UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-3523
WESTERN RESOURCES, INC.
(Exact name of registrant as specified in its charter)
KANSAS 48-0290150
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
818 KANSAS AVENUE, TOPEKA, KANSAS 66612
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code 785/575-6300
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $5.00 par value New York Stock Exchange
(Title of each class) (Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:
Preferred Stock, 4 1/2% Series, $100 par value
(Title of Class)
Indicated by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. (x)
State the aggregate market value of the voting stock held by nonaffiliates of
the registrant. Approximately $2,763,555,727 of Common Stock and $13,682,460 of
Preferred Stock (excluding the 4 1/4% Series of Preferred Stock for which there
is no readily ascertainable market value) at March 27,1997.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock.
Common Stock, $5.00 par value 65,409,603
- ----------------------------- ---------------------
(Class) (Outstanding at March 30, 1998)
Documents Incorporated by Reference:
Part Document
III Items 10-13 of the Company's Definitive Proxy Statement for the
Annual Meeting of Shareholders to be held May 11, 1998.
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WESTERN RESOURCES, INC.
FORM 10-K/A
December 31, 1997
TABLE OF CONTENTS
Description Page
PART I
Item 1. Business 3
Item 2. Properties 22
Item 3. Legal Proceedings 23
Item 4. Submission of Matters to a Vote of
Security Holders 24
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters 24
Item 6. Selected Financial Data 25
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 26
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk 41
Item 8. Financial Statements and Supplementary Data 42
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 74
PART III
Item 10. Directors and Executive Officers of the
Registrant 74
Item 11. Executive Compensation 74
Item 12. Security Ownership of Certain Beneficial
Owners and Management 74
Item 13. Certain Relationships and Related Transactions 74
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 75
Signatures 76
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PART I
ITEM 1. BUSINESS
GENERAL
The company is a publicly traded holding company, incorporated in 1924.
The company's primary business activities are providing electric generation,
transmission and distribution services to approximately 614,000 customers in
Kansas; providing security alarm monitoring services to approximately 950,000
customers located throughout the United States, providing natural gas
transmission and distribution services to approximately 1.4 million customers in
Oklahoma and Kansas through its ownership of a 45% equity interest in ONEOK Inc.
(ONEOK) and investing in international power projects. Rate regulated electric
service is provided by KPL, a division of the company and Kansas Gas and
Electric Company (KGE), a wholly-owned subsidiary. Security services are
provided by Protection One, Inc. (Protection One), a publicly-traded,
approximately 82.4%- owned subsidiary. KGE owns 47% of Wolf Creek Nuclear
Operating Corporation (WCNOC), the operating company for Wolf Creek Generating
Station (Wolf Creek). Corporate headquarters of the company is located at 818
Kansas Avenue, Topeka, Kansas 66612. At December 31, 1997, the company had 2,412
employees.
On February 7, 1997, the company signed a merger agreement with Kansas
City Power & Light Company (KCPL) by which KCPL would be merged with and into
the company in exchange for company stock. In December 1997, representatives of
the company's financial advisor indicated that they believed it was unlikely
that they would be in a position to issue a fairness opinion required for the
merger on the basis of the previously announced terms.
On March 18, 1998, the company and KCPL announced a restructuring of their
February 7, 1997, merger agreement which will result in the formation of Westar
Energy, a new electric company. Under the terms of the merger agreement, the
electric utility operations of the company will be transferred to KGE, and KCPL
and KGE will be merged into NKC, Inc., a subsidiary of the company. NKC, Inc.
will be renamed Westar Energy. In addition, under the terms of the merger
agreement, KCPL shareowners will receive $23.50 of company common stock per KCPL
share, subject to a collar mechanism, and one share of Westar Energy common
stock per KCPL share. Upon consummation of the combination, the company will own
approximately 80.1% of the outstanding equity of Westar Energy and KCPL
shareowners will own approximately 19.9%. As part of the combination, Westar
Energy will assume all of the electric utility related assets and liabilities of
the company, KCPL and KGE.
Westar Energy will assume $2.7 billion in debt, consisting of $1.9 billion
of indebtedness for borrowed money of the company and KGE, and $800 million of
debt of KCPL. Long-term debt of Western Resources and KGE was $2.1 billion at
December 31, 1997. Under the terms of the merger agreement, it is intended that
the company will be released from its obligations with respect to the company's
debt to be assumed by Westar Energy.
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Pursuant to the merger agreement, the company has agreed, among other
things, to call for redemption all outstanding shares of its 4 1/2% Series
Preferred Stock, par value $100 per share, 4 1/4% Series Preferred Stock, par
value $100 per share, and 5% Series Preferred Stock, par value $100 per share.
Consummation of the merger is subject to customary conditions including
obtaining the approval of the company's and KCPL's shareowners and various
regulatory agencies. The company estimates the transaction to close by mid-1999,
subject to receipt of all necessary approvals.
KCPL is a public utility company engaged in the generation, transmission,
distribution, and sale of electricity to customers in western Missouri and
eastern Kansas. The company, KCPL and KGE have joint interests in certain
electric generating assets, including Wolf Creek. For additional information,
see "Financing" below, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Note 5 of "Notes to Consolidated
Financial Statements".
On December 12, 1996, the company and ONEOK announced an agreement to form
a strategic alliance combining the natural gas assets of both companies. In
November 1997, the company completed its strategic alliance with ONEOK. The
company contributed substantially all of its regulated and non-regulated natural
gas business to ONEOK in exchange for a 45% ownership interest in ONEOK. The
company will account for its common ownership in accordance with the equity
method of accounting. Subsequent to the formation of the strategic alliance, the
consolidated energy sales, related cost of sales and operating expenses for the
company's natural gas business were replaced by investment earnings in ONEOK.
The related assets and liabilities were removed from the Consolidated Balance
Sheets at November 30, 1997.
During 1996, the company acquired 27% of the common shares of ADT Limited,
Inc. (ADT) and made an offer to acquire the remaining ADT common shares. ADT
rejected this offer and in July 1997, ADT merged with Tyco International Ltd.
(Tyco). ADT and Tyco completed their merger by exchanging ADT common stock for
Tyco common stock. Following the ADT and Tyco merger, the company's equity
investment in ADT became an available-for-sale security. During the third
quarter of 1997, the company sold its Tyco common shares for approximately $1.5
billion.
On December 30, 1996, the company purchased the assets and assumed certain
liabilities comprising Westinghouse Security Systems, Inc. (WSS), a security
alarm monitoring company, for approximately $358 million. The net assets and
operations of WSS were contributed to Protection One in November, 1997 when the
company acquired its equity interest in Protection One.
In 1997 the company acquired three monitored security alarm companies. The
company acquired Network Multi-Family Security Corporation (Network
Multi-Family) in September 1997 for approximately $171 million and acquired
Centennial Holdings, Inc. (Centennial) in November 1997 for approximately $94
million. The company also acquired an approximate 82.4% equity interest in
Protection One, a publicly traded security alarm monitoring company, in November
1997. The company contributed all of its existing security business net assets,
other than Network Multi-Family, in exchange for its ownership interest in
Protection One.
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In February 1998, Protection One exercised its option to acquire the stock
of Network Holdings, Inc., the parent company of Network Multi-Family, from the
company for approximately $180 million.
In March 1998, Protection One acquired the security alarm monitoring
business of Multimedia Security Services, Inc. (Multimedia Security) for
approximately $233 million. Multimedia Security has approximately 140,000
subscribers concentrated primarily in California, Florida, Kansas, Oklahoma and
Texas. Protection One borrowed money from Westar Capital, a subsidiary of the
company,
to complete this transaction.
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In February 1996, the company purchased The Wing Group Limited (The Wing
Group). The Wing Group is a wholly-owned developer of international power
projects.
On July 1, 1995, the company established Midcontinent Market Center
(Market Center) which provided natural gas transportation, storage, and
gathering services, as well as balancing and title transfer capability. The
company contributed certain natural gas transmission assets having a net book
value of approximately $50 million to the Market Center. The Market Center
provided no notice natural gas transportation and storage services to the
company under a long-term contract. The assets of the Market Center were
transferred to ONEOK in November 1997, upon the completion of the strategic
alliance with ONEOK.
On January 31, 1994, the company sold substantially all of its Missouri
natural gas distribution properties and operations to Southern Union Company
(Southern Union) for $404 million. The company sold the remaining Missouri
properties to United Cities Gas Company (United Cities) for $665,000 on February
28, 1994. The properties sold to Southern Union and United Cities are referred
to herein as the "Missouri Properties." As of the respective dates of the sales
of the Missouri Properties, the company ceased recording the results of
operations, and removed the assets and liabilities from the Consolidated Balance
Sheets related to the Missouri Properties.
The United States electric utility industry is evolving from a regulated
monopolistic market to a competitive marketplace. The 1992 Energy Policy Act
began deregulating the electricity industry. The Energy Policy Act permitted the
Federal Energy Regulatory Commission (FERC) to order electric utilities to allow
third parties the use of their transmission systems to sell electric power to
wholesale customers. A wholesale sale is defined as a utility selling
electricity to a "middleman", usually a city or its utility company, to resell
to the ultimate retail customer. As part of the 1992 KGE merger, we agreed to
open access of our transmission system for wholesale transactions. FERC also
requires us to provide transmission services to others under terms comparable to
those we provide to ourselves.
For further discussion regarding competition and the potential impact on
the company, see Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
ELECTRIC OPERATIONS
General
The company supplies electric energy at retail to approximately 614,000
customers in 462 communities in Kansas. These include Wichita, Topeka, Lawrence,
Manhattan, Salina, and Hutchinson. The company also supplies electric energy at
wholesale to the electric distribution systems of 67 communities and 5 rural
electric cooperatives. The company has contracts for the sale, purchase or
exchange of electricity with other utilities. The company also receives a
limited amount of electricity through parallel generation.
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The company's electric sales for the last five years were as follows:
1997 1996 1995 1994 1993
------ ------ ------ ------ -----
(Thousands of MWH)
Residential. . . . 5,310 5,265 5,088 5,003 4,960
Commercial . . . . 5,803 5,667 5,453 5,368 5,100
Industrial . . . . 5,714 5,622 5,619 5,410 5,301
Wholesale and
Interchange. . . 5,334 5,908 4,012 3,899 4,525
Other. . . . . . . 107 105 108 106 103
------ ------ ------ ------ ------
Total. . . . . . 22,268 22,567 20,280 19,786 19,989
The company's electric revenues for the last five years were as follows:
1997(1) 1996 1995 1994 1993
---------- ---------- ---------- ---------- -------
(Dollars in Thousands)
Residential $ 392,751 $ 403,588 $ 396,025 $ 388,271 $ 384,618
Commercial 339,167 351,806 340,819 334,059 319,686
Industrial 254,076 262,989 268,947 265,838 261,898
Wholesale and
Interchange 142,506 143,380 104,992 106,243 118,401
Other 101,493 35,670 35,112 27,370 19,934
---------- ---------- ---------- ---------- ----------
Total $1,229,993 $1,197,433 $1,145,895 $1,121,781 $1,104,537
(1) The increase in 1997 other electric revenues reflects power marketing
revenues. See Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations for further discussion of power
marketing.
Capacity
The aggregate net generating capacity of the company's system is presently
5,319 megawatts (MW). The system comprises interests in 22 fossil fueled steam
generating units, one nuclear generating unit (47% interest), seven combustion
peaking turbines and two diesel generators located at eleven generating
stations. Two units of the 22 fossil fueled units (aggregating 100 MW of
capacity) have been "mothballed" for future use (See Item 2. Properties).
The company's 1997 peak system net load occurred July 24, 1997 and
amounted to 4,016 MW. The company's net generating capacity together with power
available from firm interchange and purchase contracts, provided a capacity
margin of approximately 18% above system peak responsibility at the time of the
peak.
The company and twelve companies in Kansas and western Missouri have
agreed to provide capacity (including margin), emergency and economy services
for each other. This arrangement is called the MOKAN Power Pool. The pool
participants also coordinate the planning of electric generating and
transmission facilities.
The company is one of 54 members of the Southwest Power Pool (SPP). SPP's
responsibility is to maintain system reliability on a regional basis. The region
encompasses areas within the eight states of Kansas, Missouri, Oklahoma, New
Mexico, Texas, Louisiana, Arkansas, and Mississippi.
The company is a member of the Western Systems Power Pool (WSPP). Under
this arrangement, over 172 electric utilities and marketers throughout the
western United States have agreed to market energy and to provide transmission
services.
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WSPP's intent is to increase the efficiency of the interconnected power systems
operations over and above existing operations. Services available include
short-term and long-term economy energy transactions, unit commitment service,
firm capacity and energy sales, energy exchanges, and transmission service by
intermediate systems.
The company has an agreement with Oklahoma Municipal Power Authority
(OMPA), whereby, the company received a prepayment in 1994 of approximately $41
million for capacity (42 MW) and transmission charges through the year 2013.
KGE has an agreement with Midwest Energy, Inc. (MWE), whereby KGE will
provide MWE with peaking capacity of 61 MW through the year 2008. KGE also
entered into an agreement with Empire District Electric Company (Empire),
whereby KGE will provide Empire with peaking and base load capacity (20 MW in
1994 increasing to 80 MW in 2000) through the year 2000. The company has another
agreement with Empire, whereby the company will provide Empire with peaking and
base load capacity (10 MW in 1995 increasing to 162 MW in 2000) through the year
2010.
Future Capacity
The company does not contemplate any significant expenditures in
connection with construction of any major generating facilities for the next
five years. (See Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations).
Fuel Mix
The company's coal-fired units comprise 3,311 MW of the total 5,319 MW of
generating capacity and the company's nuclear unit provides 547 MW of capacity.
Of the remaining 1,461 MW of generating capacity, units that can burn either
natural gas or oil account for 1,377 MW, and the remaining units which burn only
diesel fuel account for 84 MW (See Item 2. Properties).
During 1997, low sulfur coal was used to produce 78% of the company's
electricity. Nuclear produced 17% and the remainder was produced from natural
gas, oil, or diesel fuel. During 1998, based on the company's estimate of the
availability of fuel, coal will be used to produce approximately 77% of the
company's electricity and nuclear will be used to produce approximately 18%.
The company's fuel mix fluctuates with the operation of nuclear powered
Wolf Creek which has an 18-month refueling and maintenance schedule. The
18-month schedule permits uninterrupted operation every third calendar year.
Wolf Creek was taken off-line on October 4, 1997 for its ninth refueling and
maintenance outage which lasted approximately 58 days during which time electric
demand was met primarily by the company's coal-fired generating units.
Nuclear
The owners of Wolf Creek have on hand or under contract 100% of their
uranium needs for 1998 and 59% of the uranium required to operate Wolf Creek
through September 2003. The balance is expected to be obtained through spot
market and contract purchases. The company has three active contracts with the
following companies for uranium: Cameco Corporation, Geomex Minerals, Inc., and
Power Resources, Inc.
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A contractual arrangement is in place with Cameco Corporation for the
conversion of uranium to uranium hexafluoride sufficient for the operation of
Wolf Creek through the year 2001.
The company has two active contracts for uranium enrichment performed by
Urenco and USEC. Contracted arrangements cover 80% of Wolf Creek's uranium
enrichment requirements for operation of Wolf Creek through March 2005. The
balance is expected to be obtained through spot market and term contract
purchases.
The company has entered into all of its uranium, uranium hexaflouride and
uranium enrichment arrangements during the ordinary course of business and is
not substantially dependent upon these agreements. The company believes there
are other suppliers available at reasonable prices to replace, if necessary,
these contracts. In the event that the company were required to replace these
contracts, it would not anticipate a substantial disruption of its business.
Nuclear fuel is amortized to cost of sales based on the quantity of heat
produced for the generation of electricity. Under the Nuclear Waste Policy Act
of 1982, the Department of Energy (DOE) is responsible for the permanent
disposal of spent nuclear fuel. The company pays the DOE a quarterly fee of
one-tenth of a cent for each kilowatt-hour of net nuclear generation delivered
and sold for future disposal of spent nuclear fuel. These disposal costs are
charged to cost of sales and currently recovered through rates.
In 1996, a U.S. Court of Appeals issued a decision that the Nuclear Waste
Act unconditionally obligated the DOE to begin accepting spent fuel for disposal
in 1998. In late 1997, the same court issued another decision precluding the DOE
from concluding that its delay in accepting spent fuel is "unavoidable" under
its contracts with utilities due to lack of a repository or interim storage
authority. By the end of 1997, KGE and other utilities had petitioned the DOE
for authority to suspend payments of their quarterly fees until such time as the
DOE begins accepting spent fuel. In January 1998, the DOE denied the petition of
the utilities. The company is considering its response to the DOE's action.
A permanent disposal site may not be available for the industry until 2010
or later, although an interim facility may be available earlier. Under current
DOE policy, once a permanent site is available, the DOE will accept spent
nuclear fuel on a priority basis; the owners of the oldest spent fuel will be
given the highest priority. As a result, disposal services for Wolf Creek may
not be available prior to 2016. Wolf Creek has on-site temporary storage for
spent nuclear fuel. Under current regulatory guidelines, this facility can
provide storage space until about 2005. Wolf Creek has started plans to increase
its on-site spent fuel storage capacity. That project, expected to be completed
by 2000, should provide storage capacity for all spent fuel expected to be
generated by Wolf Creek through the end of its licensed life in 2025.
The Low-Level Radioactive Waste Policy Amendments Act of 1985 mandated
that the various states, individually or through interstate compacts, develop
alternative low-level radioactive waste disposal facilities. The states of
Kansas, Nebraska, Arkansas, Louisiana and Oklahoma formed the Central Interstate
Low-Level Radioactive Waste Compact and selected a site in northern Nebraska to
locate a disposal facility. The present estimate of the cost for such a facility
is about $154 million. WCNOC and the owners of the other five nuclear units in
the compact have provided most of the pre-construction financing for this
project.
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There is uncertainty as to whether this project will be completed.
Significant opposition to the project has been raised by Nebraska officials and
residents in the area of the proposed facility, and attempts have been made
through litigation and proposed legislation in Nebraska to slow down or stop
development of the facility.
Additional information with respect to insurance coverage applicable to
the operations of the company's nuclear generating facility is set forth in Note
7 of the Notes to Consolidated Financial Statements.
Coal
The three coal-fired units at Jeffrey Energy Center (JEC) have an
aggregate capacity of 1,839 MW (company's 84% share) (See Item 2. Properties).
The company has a long-term coal supply contract with Amax Coal West, Inc.
(AMAX), a subsidiary of Cyprus Amax Coal Company, to supply low sulfur coal to
JEC from AMAX's Eagle Butte Mine or an alternate mine source of AMAX's Belle Ayr
Mine, both located in the Powder River Basin in Campbell County, Wyoming. The
contract expires December 31, 2020. The contract contains a schedule of minimum
annual delivery quantities based on MMBtu provisions. The coal to be supplied is
surface mined and has an average Btu content of approximately 8,300 Btu per
pound and an average sulfur content of .43 lbs/MMBtu (See Environmental
Matters). The average delivered cost of coal for JEC was approximately $1.13 per
MMBtu or $18.92 per ton during 1997.
Coal is transported from Wyoming under a long-term rail transportation
contract with Burlington Northern Santa Fe (BNSF) and Union Pacific (UP)
railroads to JEC through December 31, 2013. Rates are based on net load carrying
capabilities of each rail car. The company provides 868 aluminum rail cars,
under a 20 year lease, to transport coal to JEC.
The two coal-fired units at La Cygne Station have an aggregate generating
capacity of 677 MW (KGE's 50% share) (See Item 2. Properties). The operator,
KCPL, maintains coal contracts as summarized in the following paragraphs.
La Cygne 1 uses low sulfur Powder River Basin coal which is supplied under
a variety of spot market transactions, discussed below. High Btu Kansas/Missouri
coal is blended with the Powder River Basin coal and is secured from time to
time under spot market arrangements. La Cygne 1 uses a blended fuel mix
containing approximately 85% Powder River Basin coal.
La Cygne 2 and additional La Cygne 1 Powder River Basin coal is supplied
through several contracts, expiring at various times through 1999. This low
sulfur coal had an average Btu content of approximately 8,500 Btu per pound and
a maximum sulfur content of .50 lbs/MMBtu (See Environmental Matters).
Transportation is covered by KCPL through its Omnibus Rail Transportation
Agreement with BNSF and Kansas City Southern Railroad through December 31, 2000.
During 1997, the average delivered cost of all local and Powder River
Basin coal procured for La Cygne 1 was approximately $0.70 per MMBtu or $12.31
per ton and the average delivered cost of Powder River Basin coal for La Cygne 2
was approximately $0.67 per MMBtu or $11.32 per ton.
The coal-fired units located at the Tecumseh and Lawrence Energy Centers
have an aggregate generating capacity of 795 MW (See Item 2. Properties). The
company contracted with Cyprus Amax Coal Company's Foidel Creek Mine located in
Routt
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County, Colorado for low sulfur coal through December 31, 1998. This coal is
transported by Union Pacific and BNSF railroads under contracts expiring
December 31, 1998. The company anticipates that the Cyprus agreement will supply
the minimum requirements of the Tecumseh and Lawrence Energy Centers and
supplemental coal requirements will continue to be supplied from coal markets in
Montana, Wyoming, Utah, Colorado and/or New Mexico. The company is currently
seeking coal supply through 2000 to replace the expiring Cyprus coal agreement.
Additional spot market coal for 1998 has been secured from Kennecott Coal
Company with rail transportation supplied by BNSF railroad. During 1997, the
average delivered cost of coal for the Lawrence units was approximately $1.24
per MMBtu or $26.89 per ton and the average delivered cost of coal for the
Tecumseh units was approximately $1.24 per MMBtu or $26.76 per ton. The coal
supplied in 1997 had an average Btu content of approximately 10,842 Btu per
pound and an average sulfur content of .42 lbs/MMBtu (See Environmental
Matters).
The company has entered into all of its coal contracts during the ordinary
course of business and is not substantially dependent upon these contracts. The
company believes there are other suppliers for and plentiful sources of coal
available at reasonable prices to replace, if necessary, fuel to be supplied
pursuant to these contracts. In the event that the company were required to
replace its coal agreements, it would not anticipate a substantial disruption of
the company's business.
The company has entered into all of its transportation contracts during
the ordinary course of business. At the time of entering into these contracts,
the company was not substantially dependent upon these contracts due to the
availability of competitive rail options. Due to recent rail consolidation,
there are now only two rail carriers capable of serving the company's origin
coal mines and its generating stations. In the event one of these carriers
became unable to provide reliable service, the company could experience a
short-term disruption of its business. However, due to the obligation of the
remaining carriers to provide service under the Interstate Commerce Act, the
company does not anticipate any substantial long-term disruption of its
business. See also Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Natural Gas
The company uses natural gas as a primary fuel in its Gordon Evans, Murray
Gill, Abilene, and Hutchinson Energy Centers and in the gas turbine units at its
Tecumseh generating station. Natural gas is also used as a supplemental fuel in
the coal-fired units at the Lawrence and Tecumseh generating stations. Natural
gas for all facilities is supplied by readily available gas from the short-term
economical spot market and will supply the system with the flexible natural gas
supply to meet operational needs.
Oil
The company uses oil as an alternate fuel when economical or when
interruptions to natural gas make it necessary. Oil is also used as a
supplemental fuel at JEC and La Cygne generating stations. All oil burned by the
company during the past several years has been obtained by spot market
purchases. At December 31, 1997, the company had approximately 3 million gallons
of No. 2 oil and 17 million gallons of No. 6 oil which it believes to be
sufficient to meet emergency requirements and protect against lack of
availability of natural gas and/or the loss of a large generating unit.
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Other Fuel Matters
The company's contracts to supply fuel for its coal and natural gas-fired
generating units, with the exception of JEC, do not provide full fuel
requirements at the various stations. Supplemental fuel is procured on the spot
market to provide operational flexibility and, when the price is favorable, to
take advantage of economic opportunities.
Set forth in the table below is information relating to the weighted
average cost of fuel used by the company.
KPL Plants 1997 1996 1995 1994 1993
---------- ----- ----- ----- ----- -----
Per Million Btu:
Coal . . . . . . . . $1.17 $1.14 $1.15 $1.13 $1.13
Gas. . . . . . . . . 2.88 2.50 1.63 2.66 2.71
Oil. . . . . . . . . 3.72 4.01 4.34 4.27 4.41
Cents per KWH Generation . 1.32 1.30 1.31 1.32 1.31
KGE Plants 1997 1996 1995 1994 1993
---------- ----- ----- ----- ----- -----
Per Million Btu:
Nuclear. . . . . . . $0.51 $0.50 $0.40 $0.36 $0.35
Coal . . . . . . . . 0.89 0.88 0.91 0.90 0.96
Gas. . . . . . . . . 2.56 2.30 1.68 1.98 2.37
Oil. . . . . . . . . 3.32 2.74 4.00 3.90 3.15
Cents per KWH Generation . 1.00 0.93 0.82 0.89 0.93
Environmental Matters
The company currently holds all Federal and State environmental approvals
required for the operation of its generating units. The company believes it is
presently in substantial compliance with all air quality regulations (including
those pertaining to particulate matter, sulfur dioxide and nitrogen oxides
(NOx)) promulgated by the State of Kansas and the Environmental Protection
Agency (EPA).
The Federal sulfur dioxide standards, applicable to the company's JEC and
La Cygne 2 units, prohibit the emission of more than 1.2 pounds of sulfur
dioxide per million Btu of heat input. Federal particulate matter emission
standards applicable to these units prohibit: (1) the emission of more than 0.1
pounds of particulate matter per million Btu of heat input and (2) an opacity
greater than 20%. Federal NOx emission standards applicable to these units
prohibit the emission of more than 0.7 pounds of NOx per million Btu of heat
input.
The JEC and La Cygne 2 units have met: (1) the sulfur dioxide standards
through the use of low sulfur coal (See Coal); (2) the particulate matter
standards through the use of electrostatic precipitators; and (3) the NOx
standards through boiler design and operating procedures. The JEC units are also
equipped with flue gas scrubbers providing additional sulfur dioxide and
particulate matter emission reduction capability when needed to meet permit
limits.
The Kansas Department of Health and Environment (KDHE) regulations,
applicable to the company's other generating facilities, prohibit the emission
of more than 2.5 pounds of sulfur dioxide per million Btu of heat input at two
of the company's Lawrence generating units and 3.0 pounds at all other
generating
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units. There is sufficient low sulfur coal under contract (See Coal) to allow
compliance with such limits at Lawrence, Tecumseh and La Cygne 1 for the life of
the contracts. All facilities burning coal are equipped with flue gas scrubbers
and/or electrostatic precipitators.
The company must comply with the provisions of The Clean Air Act
Amendments of 1990 that require a two-phase reduction in certain emissions. The
company has installed continuous monitoring and reporting equipment to meet the
acid rain requirements. The company does not expect material capital
expenditures to be required to meet Phase II sulfur dioxide and nitrogen oxide
requirements.
All of the company's generating facilities are in substantial compliance
with the Best Practicable Technology and Best Available Technology regulations
issued by the EPA pursuant to the Clean Water Act of 1977. Most EPA regulations
are administered in Kansas by the KDHE.
Additional information with respect to Environmental Matters is discussed
in Note 7 of the Notes to Consolidated Financial Statements included herein.
NATURAL GAS OPERATIONS
General
Under the agreement for the strategic alliance with ONEOK, the company
contributed substantially all of its natural gas business to ONEOK on November
30, 1997, in exchange for a 45% equity interest. See Note 4 of the Notes to the
Consolidated Financial Statements for further information.
ONEOK is a diversified energy company engaged in the production,
gathering, storage, transportation, distribution and marketing of natural gas
and natural gas products. ONEOK's regulated business operations provides natural
gas distribution and transmission in Oklahoma and Kansas. ONEOK's nonregulated
business operations include natural gas marketing, gas processing and
production.
The company's natural gas operations prior to November 30, 1997, were
comprised primarily of the following four components: a local natural gas
distribution division which was subject to rate-regulation; Market Center, a
Kansas subsidiary of the company that engaged primarily in intrastate gas
transmission, as well as gas wheeling, parking, balancing and storage services,
and was also subject to rate-regulation; Westar Gas Marketing, Inc., (Westar Gas
Marketing) a Kansas non-regulated indirect subsidiary of the company that was
engaged primarily in marketing and selling natural gas to small and medium-sized
commercial and industrial customers; and Westar Gas Company, a Delaware
non-regulated subsidiary of Westar Gas Marketing that was engaged in extracting,
processing and selling natural gas liquids.
During, 1997, the company supplied natural gas at retail to approximately
652,000 customers in 362 communities and at wholesale to eight communities and
two utilities in Kansas and Oklahoma. The natural gas systems of the company
consisted of distribution systems in both states purchasing natural gas from
various suppliers and transported by interstate pipeline companies and the main
system, an integrated storage, gathering, transmission and distribution system.
The company also transported gas for its large commercial and industrial
customers which purchased gas on the spot market. The company earned
approximately the same margin on the volume of gas transported as on volumes
sold except where discounting occurred in order to retain the customer's load.
13
<PAGE>
On January 31, 1994, the company sold substantially all of its Missouri
natural gas distribution properties and operations to Southern Union and sold
the remaining Missouri Properties to United Cities on February 28, 1994.
The percentage of total natural gas deliveries, including transportation
and operating revenues for 1997 (through November 30, 1997), by state were as
follows:
Total Natural Total Natural Gas
Gas Deliveries Operating Revenues
Kansas 96.8% 95.2%
Oklahoma 3.2% 4.8%
The company's natural gas deliveries for the last five years were as
follows:
1997(1) 1996 1995 1994(3) 1993
------- ------- ------- ------- ------
(Thousands of MCF)
Residential 47,602 62,728 55,810 64,804 110,045
Commercial 16,968 22,841 21,245 26,526 47,536
Industrial 296 450 548 605 1,490
Other 26,448 21,067 17,078(2) 43 41
Transportation 41,635 45,947 48,292 51,059 73,574
------- ------- ------- ------- -------
Total 132,949 153,033 142,973 143,037 232,686
The company's natural gas revenues related to deliveries for the last five
years were as follows:
1997(1) 1996 1995 1994(3) 1993
------- -------- --------- -------- ------
(Dollars in Thousands)
Residential $312,665 $352,905 $274,550 $332,348 $529,260
Commercial 100,394 120,927 94,349 125,570 209,344
Industrial 1,632 2,885 3,051 3,472 7,294
Other 63,608 48,643 31,860 11,544 30,143
Transportation 22,552 23,354 22,366 23,228 28,781
-------- -------- -------- -------- --------
Total $500,851 $548,714 $426,176 $496,162 $804,822
(1) The decrease in gas deliveries and revenues reflects the contribution
of the company's natural gas business to ONEOK on November 30, 1997.
(2) The increase in other gas deliveries reflects an increase in
as-available gas sales.
(3) Information reflects the sales of the Missouri Properties effective
January 31, and February 28, 1994.
As-available gas is excess natural gas under contract that the company did
not require for customer sales or storage that is typically sold to gas
marketers. According to the company's tariff, the nominal margin made on
as-available gas sales is returned 75% to customers through the cost of gas
rider and 25% is reflected in wholesale revenues of the company.
Interstate System
The company distributed natural gas at retail to approximately 520,000
customers located in central and eastern Kansas and northeastern Oklahoma. The
largest cities served in 1997 were Wichita and Topeka, Kansas and Bartlesville,
Oklahoma. The company had transportation agreements for delivery of this gas
14
<PAGE>
with terms varying in length from one to twenty years, with the following
non-affiliated pipeline transmission companies: Williams Natural Gas Pipelines
Central (WNG), Kansas Pipeline Partnership (KPP), Panhandle Eastern Pipeline
Company (Panhandle), and various other intrastate suppliers. The volumes
transported under these agreements in for the past three years were as follows:
Transportation Volumes (BCF's)
1997(1) 1996 1995
------ ---- ----
WNG. . . . . . . 74.1 79.4 61.8
KPP. . . . . . . 5.2 7.3 7.1
Panhandle. . . . 1.1 1.2 1.0
Others . . . . . 0.8 2.1 8.0
(1) Information reflects the contribution of the company's natural gas
business to ONEOK on November 30, 1997.
The company purchased this gas from various producers and marketers under
contracts expiring at various times. The company purchased approximately 71.5
BCF or 88.1% of its natural gas supply from these sources in 1997 and 78.4 BCF
or 91.9% during 1996.
In October 1994, the company executed a long-term gas purchase contract
(Base Contract) and a peaking supply contract with Amoco Production Company for
the purpose of meeting at least 50% of the requirements of the customers served
from the company's interstate system over the WNG pipeline system.
The company also purchased natural gas from KPP under contracts expiring
at various times. These purchases were approximately 3.3 BCF or 4.1% of its
natural gas supply in 1997 and 5.2 BCF or 5.8% during 1996. The company
purchased natural gas for the interstate system from intrastate pipelines and
from spot market suppliers under short-term contracts. These sources totaled 5.6
BCF and 0.6 BCF for 1997 and 1996 representing 6.8% and 0.7% of the system
requirements, respectively.
During 1997 and 1996, approximately 0.8 BCF and 1.5 BCF, respectively,
were transferred from the company's main system to serve a portion of the demand
for the interstate system representing 1.0% and 1.6%, respectively, of the
interstate system supply.
The average wholesale cost per thousand cubic feet (MCF) purchased for the
distribution systems for the past five years were as follows:
Interstate Pipeline Supply
(Average Cost per MCF)
1997 1996 1995 1994 1993
----- ----- ----- ----- -----
WNG . . . . . . . . . $ - $ - $ - $ - $3.57
Other . . . . . . . . 3.65 3.09 2.78 3.32 3.01
Total Average Cost. . 3.65 3.09 2.78 3.32 3.23
Main System
During 1997, the company served approximately 130,000 customers in central
and north central Kansas with natural gas supplied through the main system. The
principal market areas include Salina, Manhattan, Junction City, Great Bend,
McPherson and Hutchinson, Kansas.
15
<PAGE>
Natural gas for the company's main system was purchased from a combination
of direct wellhead production, the outlet of natural gas processing plants, and
natural gas marketers and production companies. Such purchases were transported
entirely through company-owned transmission lines in Kansas.
Natural gas purchased for the company's main system customer requirements
was transported and/or stored by the Market Center. The company retained a
priority right to capacity on the Market Center necessary to serve the main
system customers. The company had the opportunity to negotiate for the purchase
of natural gas with producers or marketers utilizing Market Center services,
which increased the potential supply available to meet main system customer
demands.
The company purchased approximately 4.4 BCF and 7.6 BCF of natural gas
during 1997 and 1996, respectively, through the spot market. These purchases
represented approximately 35.2% and 45.5% of the company's main system
requirements during 1997 and 1996, respectively.
Spivey-Grabs field in south-central Kansas supplied approximately 3.9 BCF
of natural gas in 1997 and 4.2 BCF in 1996, constituting 31.0% and 25.1%,
respectively, of the main system's requirements during such periods.
Other sources of gas for the main system of 3.0 BCF or 24.0% and 2.7 BCF
or 16.0% of the system requirements were purchased from or transported through
interstate pipelines during 1997 and 1996, respectively. The remainder of the
supply for the main system during 1997 and 1996 of 1.2 BCF and 2.2 BCF
representing 9.8% and 13.4%, respectively, was purchased directly from producers
or gathering systems.
During 1997 and 1996, approximately 0.8 BCF and 1.5 BCF, respectively, of
the total main system supply was transferred to the company's interstate system
(See Interstate System).
The main system's average wholesale cost per MCF purchased for the past
five years was as follows:
Natural Gas Supply - Main System
(Average Cost per MCF)
1997 1996 1995 1994 1993
----- ----- ----- ----- -----
Mesa-Hugoton Contract. . $ - $ - $1.44 $1.81 $1.78(1)
Other. . . . . . . . . . 3.43 2.48 2.47 2.92 2.69
Total Average Cost . . . 3.43 2.48 2.06 2.23 2.20
(1) Includes 2.5 BCF @ $1.31/MCF of make-up deliveries.
The load characteristics of the company's natural gas customers created
relatively high volume demand on the main system during cold winter days. To
assure peak day service to high priority customers the company owned and
operated and had under contract natural gas storage facilities (See Item 2.
Properties).
WESTAR GAS MARKETING
Westar Gas Marketing was formed in 1988 to pursue natural gas marketing
opportunities. Westar Gas Marketing purchased and marketed natural gas to
approximately 925 customers located in Kansas, Missouri, Nebraska, Colorado,
Oklahoma, Iowa, Wyoming and Arkansas. Westar Gas Marketing purchased natural gas
16
<PAGE>
under both long-term and short-term contracts from producers and operators in
the Hugoton, Arkoma and Anadarko gas basins. Westar Gas Marketing engaged in
certain transactions to hedge natural gas prices in its gas marketing
activities. The net assets and operations of Westar Gas Marketing were
contributed to ONEOK in November 1997, upon the completion of the strategic
alliance with ONEOK.
WESTAR GAS COMPANY
Westar Gas Company owned and operated the Minneola Gas Processing Plant
(Minneola) in Ford County, Kansas. Minneola extracts liquids from natural gas
provided by outside producers and sells the residue gas to third-party
marketers. A portion of the residue gas is sold to Westar Gas Marketing.
Westar Gas Company, through its participation in various joint ventures,
owned a 41.4% beneficial interest in the Indian Basin Processing Plant (Indian
Basin) near Artesia, New Mexico. Indian Basin is operated by Marathon Oil and
extracts natural gas liquids for third party producers. The net assets and
operations of Westar Gas Company were contributed to ONEOK in November 1997,
upon the completion of the strategic alliance with ONEOK.
SECURITY ALARM MONITORING OPERATIONS
On July 30, 1997, the company agreed to combine its security alarm
monitoring business with Protection One, a publicly held security alarm
monitoring provider. On November 24, 1997, the company completed the transaction
by contributing approximately $532 million in security alarm monitoring business
net assets and approximately $258 million in cash in exchange for an approximate
82.4% ownership in Protection One.
Protection One is a leading provider of security alarm monitoring and
related services in the United States with approximately 950,000 subscribers.
Protection One has grown rapidly since its inception by participating in both
the growth and consolidation of the security alarm monitoring industry.
Protection One has focused its customer growth in major metropolitan areas
demonstrating strong demand for security alarms.
Protection One's revenues consist primarily of subscribers' recurring
payments for monitoring and related services. Protection One monitors digital
signals arising from burglaries, fires, and other events utilizing security
systems installed at subscribers' premises. Through a network of approximately
60 branches, Protection One provides maintenance and repair of security systems
and, in select markets, armed response to verify that an actual emergency,
rather than a false alarm, has occurred.
Protection One provides its services to the residential, commercial and
wholesale segments of the alarm monitoring market. Protection One believes the
residential segment, which represents in excess of 80% of its customer base, is
the most attractive because of its growth prospects, growth margins and size.
Within the residential segment, 19% of Protection One's customer base resides in
multi-family complexes such as apartments and condominiums and 62% occupy
single-family households. The remainder of Protection One's customer base is
split between commercial subscribers and subscribers owned by independent alarm
dealers that subcontract monitoring services to Protection One.
17
<PAGE>
SEGMENT INFORMATION
Financial information with respect to business segments is set forth in
Note 20 of the Notes to Consolidated Financial Statements included herein.
FINANCING
The company's ability to issue additional debt and equity securities is
restricted under limitations imposed by the charter and the Mortgage and Deed of
Trust of Western Resources and KGE.
Western Resources' mortgage prohibits additional Western Resources first
mortgage bonds from being issued (except in connection with certain refundings)
unless the company's net earnings available for interest, depreciation and
property retirement for a period of 12 consecutive months within 15 months
preceding the issuance are not less than the greater of twice the annual
interest charges on, or 10% of the principal amount of, all first mortgage bonds
outstanding after giving effect to the proposed issuance. Based on the company's
results for the 12 months ended December 31, 1997, no first mortgage bonds could
be issued (7.25% interest rate assumed).
Western Resources' bonds may be issued, subject to the restrictions in the
preceding paragraph, on the basis of property additions not subject to an
unfunded prior lien and on the basis of bonds which have been retired. As of
December 31, 1997, the company had approximately $225 million of net bondable
property additions not subject to an unfunded prior lien entitling the company
to issue up to $135 million principal amount of additional bonds. As of December
31, 1997, no first mortgage bonds could be issued on the basis of retired bonds.
KGE's mortgage prohibits additional KGE first mortgage bonds from being
issued (except in connection with certain refundings) unless KGE's net earnings
before income taxes and before provision for retirement and depreciation of
property for a period of 12 consecutive months within 15 months preceding the
issuance are not less than two and one-half times the annual interest charges
on, or 10% of the principal amount of, all KGE first mortgage bonds outstanding
after giving effect to the proposed issuance. Based on KGE's results for the 12
months ended December 31, 1997, approximately $935 million principal amount of
additional KGE first mortgage bonds could be issued (7.25% interest rate
assumed).
KGE's bonds may be issued, subject to the restrictions in the preceding
paragraph, on the basis of property additions not subject to an unfunded prior
lien and on the basis of bonds which have been retired. As of December 31, 1997,
KGE had approximately $1.4 billion of net bondable property additions not
subject to an unfunded prior lien entitling KGE to issue up to $961 million
principal amount of additional KGE bonds. As of December 31, 1997, $17 million
in additional bonds could be issued on the basis of retired bonds.
The most restrictive provision of the company's charter permits the
issuance of additional shares of preferred stock without certain specified
preferred stockholder approval only if, for a period of 12 consecutive months
within 15 months preceding the issuance, net earnings available for payment of
interest exceed one and one-half times the sum of annual interest requirements
plus dividend requirements on preferred stock after giving effect to the
proposed issuance.
18
<PAGE>
After giving effect to the annual interest and dividend requirements on all debt
and preferred stock outstanding at December 31, 1997, such ratio was 4.17 for
the 12 months ended December 31, 1997.
In connection with the combination of the electric utility operations of
the company, KCPL and KGE, Westar Energy will assume $1.9 billion of
indebtedness for borrowed money of the company and KGE comprised primarily of
the companies' outstanding long-term debt. In connection with the transfer of
Western Resources' electric utility operations, which constitute all of the
property subject to the Mortgage and Deed of Trust, dated July 1, 1939,
(Mortgage) between the company and Harris Trust and Savings Bank, as trustee,
and substantially all of the assets of Western Resources, to Westar Energy, the
company in accordance with the Mortgage will assign and be released from, and
Westar Energy will assume, the Mortgage and all obligations of the company under
the Mortgage and all first mortgage bonds outstanding thereunder. Pursuant to
the amended and restated agreement and plan of merger, KGE's mortgage, by
operation of law, will be assumed by Westar Energy. The company will not
transfer and will continue to hold its investments in its unregulated
operations, including Protection One and ONEOK. See, "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and Note 5 of
"Notes to Consolidated Financial Statements".
KCPL has outstanding first mortgage bonds (the "KCPL Bonds") which are
secured by a lien on substantially all of KCPL's fixed property and franchises
purported to be conveyed by the General Mortgage Indenture and Deed of Trust and
the various Supplemental Indentures creating the KCPL Bonds (collectively, the
"KCPL Mortgage"). Westar Energy has agreed to assume $800 million of debt from
KCPL. The KCPL mortgage will have a prior lien on the KCPL property and
franchises to be owned by Westar Energy.
REGULATION AND RATES
The company is subject as an operating electric utility to the
jurisdiction of the Kansas Corporation Commission (KCC) which has general
regulatory authority over the company's rates, extensions and abandonments of
service and facilities, valuation of property, the classification of accounts
and various other matters. The company is subject to the jurisdiction of the
FERC and KCC with respect to the issuance of securities.
Electric fuel costs are included in base rates. Therefore, if the company
wished to recover an increase in fuel costs, it would have to file a request for
recovery in a rate filing with the KCC which could be denied in whole or in
part. Any increase in fuel costs from the projected average which the company
did not recover through rates would reduce its earnings. The degree of any such
impact would be affected by a variety of factors, however, and thus cannot be
predicted.
The company is exempt as a public utility holding company pursuant to
Section 3(a)(1) of the Public Utility Holding Company Act of 1935 from all
provisions of that Act, except Section 9(a)(2). Additionally, the company is
subject to the jurisdiction of the FERC, including jurisdiction as to rates with
respect to sales of electricity for resale. KGE is also subject to the
jurisdiction of the Nuclear Regulatory Commission as to nuclear plant operations
and safety.
Additional information with respect to Rate Matters and Regulation as set
forth in Note 8 of Notes to Consolidated Financial Statements is included
herein.
19
<PAGE>
EMPLOYEE RELATIONS
As of December 31, 1997, the company had 2,412 employees. The company did
not experience any strikes or work stoppages during 1997. The company's current
contract with the International Brotherhood of Electrical Workers extends
through June 30, 1999. The contract covers approximately 1,483 employees.
20
<PAGE>
<TABLE>
<CAPTION>
EXECUTIVE OFFICERS OF THE COMPANY
Other Offices or Positions
Name Age Present Office Held During Past Five Years
<S> <C> <C> <C>
John E. Hayes, Jr. 60 Chairman of the Board President
and Chief Executive
Officer
David C. Wittig 42 President Executive Vice President,
(since March 1996) Corporate Strategy
(May 1995 to March 1996)
Salomon Brothers Inc -
Managing Director, Co-Head of
Mergers and Acquisitions
Norman E. Jackson 60 Executive Vice President, Executive Vice President,
Electric Operations Electric Transmission and
(since November 1996) Engineering Services
(May 1995 to November 1996)
Executive Vice President,
Electric Engineering and Field
Operations (1992 to 1995)
Steven L. Kitchen 52 Executive Vice President
and Chief Financial
Officer
Carl M. Koupal, Jr. 44 Executive Vice President Executive Vice President
and Chief Administrative Corporate Communications,
Officer (since July 1995) Marketing, and Economic Development
(January 1995 to July 1995)
Vice President, Corporate Marketing,
And Economic Development, (1992 to
1994)
John K. Rosenberg 52 Executive Vice President
and General Counsel
Jerry D. Courington 52 Controller
Executive officers serve at the pleasure of the Board of Directors. There are no
family relationships among any of the executive officers, nor any arrangements
or understandings between any executive officer and other persons pursuant to
which he was appointed as an executive officer.
</TABLE>
21
<PAGE>
ITEM 2. PROPERTIES
The company owns or leases and operates an electric generation,
transmission, and distribution system in Kansas.
ELECTRIC FACILITIES
Unit Year Principal Unit Capacity
Name No. Installed Fuel (MW) (1)
Abilene Energy Center:
Combustion Turbine 1 1973 Gas 66
Gordon Evans Energy Center:
Steam Turbines 1 1961 Gas--Oil 152
2 1967 Gas--Oil 382
Hutchinson Energy Center:
Steam Turbines 1 1950 Gas 16
2 1950 Gas 17
3 1951 Gas 26
4 1965 Gas 197
Combustion Turbines 1 1974 Gas 50
2 1974 Gas 49
3 1974 Gas 52
4 1975 Diesel 78
Diesel Generator 1 1983 Diesel 3
Jeffrey Energy Center (84%)(2):
Steam Turbines 1 1978 Coal 617
2 1980 Coal 617
3 1983 Coal 605
La Cygne Station (50%)(2):
Steam Turbines 1 1973 Coal 343
2 1977 Coal 334
Lawrence Energy Center:
Steam Turbines 2 1952 Gas 0 (3)
3 1954 Coal 58
4 1960 Coal 115
5 1971 Coal 384
Murray Gill Energy Center:
Steam Turbines 1 1952 Gas--Oil 44
2 1954 Gas--Oil 74
3 1956 Gas--Oil 107
4 1959 Gas--Oil 106
22
<PAGE>
Unit Year Principal Unit Capacity
Name No. Installed Fuel (MW) (1)
Neosho Energy Center:
Steam Turbines 3 1954 Gas--Oil 0 (3)
Tecumseh Energy Center:
Steam Turbines 7 1957 Coal 85
8 1962 Coal 153
Combustion Turbines 1 1972 Gas 19
2 1972 Gas 20
Wichita Plant:
Diesel Generator 5 1969 Diesel 3
Wolf Creek Generating Station (47%)(2):
Nuclear 1 1985 Uranium 547
-----
Total 5,319
(1) Based on MOKAN rating.
(2) The company jointly owns Jeffrey Energy Center (84%), La Cygne Station (50%)
and Wolf Creek Generating Station (47%). KCPL jointly owns 50% of La Cygne
Station and 47% of Wolf Creek Generating Station.
(3) These units have been "mothballed" for future use.
ITEM 3. LEGAL PROCEEDINGS
On January 8, 1997, Innovative Business Systems, Ltd. (IBS) filed suit
against the company and Westinghouse Electric Corporation (WEC), Westinghouse
Security Systems, Inc. (WSS) and WestSec, Inc. (WestSec), a wholly-owned
subsidiary of the company established to acquire the assets of WSS, in Dallas
County, Texas district court (Cause No 97-00184) alleging, among other things,
breach of contract by WEC and interference with contract against the company in
connection with the sale by WEC of the assets of WSS to the company. IBS claims
that WEC improperly transferred software owned by IBS to the company and that
the company is not entitled to its use. The company has demanded WEC defend and
indemnify it. WEC and the company have denied IBS' allegations and are
vigorously defending against them. Management does not believe that the ultimate
disposition of this matter will have a material adverse effect upon the
company's overall financial condition or results of operations.
The Securities and Exchange Commission (SEC) has commenced a private
investigation relating, among other things, to the timeliness and adequacy of
disclosure filings with the SEC by the company with respect to securities of ADT
Ltd. The company is cooperating with the SEC staff in the production of records
relating to the investigation.
Additional information on legal proceedings involving the company is set
forth in Notes 7, 8, and 9 of Notes to Consolidated Financial Statements
included herein. See also Item 1. Business, Environmental Matters, and
Regulation and Rates and Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
23
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of the fiscal year
covered by this report to a vote of the company's security holders, through the
solicitation of proxies or otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Stock Trading
Western Resources common stock, which is traded under the ticker symbol
WR, is listed on the New York Stock Exchange. As of March 17, 1998, there were
58,669 common shareholders of record. For information regarding quarterly common
stock price ranges for 1997 and 1996, see Note 21 of Notes to Consolidated
Financial Statements included herein.
Dividends
Western Resources common stock is entitled to dividends when and as
declared by the Board of Directors. At December 31, 1997, the company's retained
earnings were restricted by $857,600 against the payment of dividends on common
stock. However, prior to the payment of common dividends, dividends must be
first paid to the holders of preferred stock and second to the holders of
preference stock based on the fixed dividend rate for each series.
Dividends have been paid on the company's common stock throughout the
company's history. Quarterly dividends on common stock normally are paid on or
about the first of January, April, July, and October to shareholders of record
as of or about the third day of the preceding month. Dividends increased four
cents per common share in 1997 to $2.10 per share. In January 1998, the Board of
Directors declared a quarterly dividend of 53 1/2 cents per common share, an
increase of one cent over the previous quarter. The payment of dividends is at
the discretion of the Board of Directors. Future dividends depend upon such
matters as future earnings, expectations and the financial condition of the
company. For information regarding quarterly dividend declarations for 1997 and
1996, see Note 21 of Notes to Consolidated Financial Statements included herein.
See also Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
24
<PAGE>
<TABLE>
<CAPTION>
ITEM 6. SELECTED FINANCIAL DATA
Year Ended December 31, 1997(1)(2) 1996 1995 1994(3) 1993
---------- ---------- ---------- ---------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Sales:
Energy. . . . . . . . . . . $1,999,418 $2,038,281 $1,743,930 $1,764,769 $2,028,411
Security. . . . . . . . . . 152,347 8,546 344 - -
---------- ---------- ---------- ---------- -------
Total sales. . . . . . . . . 2,151,765 2,046,827 1,744,274 1,764,769 2,028,411
Income from operations. . . . 142,925 388,553 373,721 370,672 370,338
Net income . . . . . . . . . 494,094 168,950 181,676 187,447 177,370
Earnings available for common
stock. . . . . . . . . . . 489,175 154,111 168,257 174,029 163,864
December 31, 1997(2) 1996 1995 1994(3) 1993
---------- ---------- ---------- ---------- -------
(Dollars in Thousands)
Balance Sheet Data:
Total assets. . . . . . . . . $6,976,960 $6,647,781 $5,490,677 $5,371,029 $5,412,048
Long-term debt, preference
stock, and other mandatorily
redeemable securities. . . . 2,451,855 1,951,583 1,641,263 1,507,028 1,673,988
Year Ended December 31, 1997 1996 1995 1994(3) 1993
------ ------ ------ ------- -----
Common Stock Data:
Basic earnings per share . . . . . $ 7.51 $ 2.41 $ 2.71 $ 2.82 $ 2.76
Dividends per share. . . . . . . . $ 2.10 $ 2.06 $ 2.02 $ 1.98 $ 1.94
Book value per share . . . . . . . $30.79 $25.14 $24.71 $23.93 $23.08
Average shares outstanding(000's) 65,128 63,834 62,157 61,618 59,294
Interest coverage ratio (before
income taxes, including
AFUDC) . . . . . . . . . . . . . 5.52 2.67 3.14 3.42 2.79
(1) Information reflects the gain on the sale of Tyco common shares.
(2) Information reflects the contribution of the natural gas business to ONEOK
on November 30, 1997. (3) Information reflects the sales of the Missouri
Properties.
</TABLE>
25
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
In Management's Discussion and Analysis we explain the general financial
condition and the operating results for Western Resources, Inc. and its
subsidiaries. We explain:
- What factors impact our business - What our earnings and costs were in
1997 and 1996 - Why these earnings and costs differed from year to year -
How our earnings and costs affect our overall financial condition - What
our capital expenditures were for 1997 - What we expect our capital
expenditures to be for the years 1998
through 2000
- How we plan to pay for these future capital expenditures - Any other
items that particularly affect our financial condition or
earnings
As you read Management's Discussion and Analysis, please refer to our
Consolidated Statements of Income on page 41. These statements show our
operating results for 1997, 1996 and 1995. In Management's Discussion and
Analysis, we analyze and explain the significant annual changes of specific line
items in the Consolidated Statements of Income.
FORWARD-LOOKING STATEMENTS: Certain matters discussed here and elsewhere
in this Annual Report are "forward-looking statements." The Private Securities
Litigation Reform Act of 1995 has established that these statements qualify for
safe harbors from liability. Forward-looking statements may include words like
we "believe," "anticipate," "expect" or words of similar meaning.
Forward-looking statements describe our future plans, objectives, expectations
or goals. Such statements address future events and conditions concerning
capital expenditures, earnings, litigation, rate and other regulatory matters,
possible corporate restructurings, mergers, acquisitions, dispositions liquidity
and capital resources, interest and dividend rates, environmental matters,
changing weather, nuclear operations and accounting matters. What happens in
each case could vary materially from what we expect because of such things as
electric utility deregulation, including ongoing state and federal activities;
future economic conditions; legislative developments; our regulatory and
competitive markets; and other circumstances affecting anticipated operations,
revenues and costs.
1997 HIGHLIGHTS
GAIN ON SALE OF EQUITY SECURITIES: During the third quarter of 1997, we
sold all of our Tyco International Ltd. (Tyco) common shares for approximately
$1.5 billion. We recorded a pre-tax gain of approximately $864 million on the
sale which is included in "Other Income" on the Consolidated Statements of
Income. We recorded tax expense of approximately $345 million in connection with
this gain. The tax on the gain is included in "Income Taxes" on the Consolidated
Statements of Income. As discussed further in "Financial Condition" below, this
significantly affected our financial results for 1997 (see Note 2).
PURCHASE OF PROTECTION ONE, INC.: On July 30, 1997, we agreed to combine
our security alarm monitoring business with Protection One, Inc.
(Protection One), a publicly held security alarm monitoring provider.
On November 24, 1997, we completed
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the transaction by contributing approximately $532 million in security alarm
monitoring business net assets and approximately $258 million in cash. The cash
contributed included funds used for a special dividend of $7.00 per common share
to Protection One shareowners, option holders and warrant holders other than
Western Resources. In exchange for our net security alarm monitoring business
assets and cash, we received approximately 82.4% ownership in Protection One. We
entered the security alarm monitoring business to make our company more diverse
and to achieve growth.
In December 1997, Protection One recorded a special non-recurring charge
of approximately $40 million. Approximately $28 million of this charge reflects
the elimination of redundant facilities and activities and the write-off of
inventory and other assets which are no longer of continuing value to Protection
One. The remaining $12 million of this charge reflects the estimated costs to
transition all security alarm monitoring operations to the Protection One brand.
Protection One intends to complete these activities by the fourth quarter of
1998.
STRATEGIC ALLIANCE WITH ONEOK INC.: On December 12, 1996, we agreed to
form a strategic alliance with ONEOK Inc. (ONEOK) to combine the natural gas
assets of both companies. In November 1997, we completed this strategic
alliance. We contributed substantially all of our regulated and non-regulated
natural gas business net assets totaling approximately $594 million to a new
company which merged with ONEOK and adopted the name ONEOK. ONEOK operates its
natural gas business in Kansas using the name Kansas Gas Service Company. In
exchange for our contribution, we received a 45% ownership interest in ONEOK.
The structure of the strategic alliance had no immediate income tax consequences
to our company or our shareowners.
Our 45% ownership interest in ONEOK is comprised of 3.1 million common
shares and approximately 19.9 million convertible preferred shares. If we
converted all the preferred shares, we would own approximately 45% of ONEOK's
common shares presently outstanding. Our agreement with ONEOK allowed us to
appoint two members to ONEOK's board of directors. ONEOK currently pays a common
dividend of $1.20 per share. The initial annual dividend rate on the convertible
preferred shares is $1.80 per share.
MERGER AGREEMENT WITH KANSAS CITY POWER & LIGHT COMPANY: On February 7,
1997, we signed a merger agreement with KCPL by which KCPL would be merged with
and into the company in exchange for company stock. In December 1997,
representatives of our financial advisor indicated that they believed it was
unlikely that they would be in a position to issue a fairness opinion required
for the merger on the basis of the previously announced terms.
On March 18, 1998, we and KCPL announced a restructuring of our February
7, 1997, merger agreement which will result in the formation of Westar Energy, a
new electric company. Under the terms of the merger agreement, our electric
utility operations will be transferred to KGE, and KCPL and KGE will be merged
into NKC, Inc., a subsidiary of the company. NKC, Inc. will be renamed Westar
Energy. In addition, under the terms of the merger agreement, KCPL shareowners
will receive $23.50 of Western Resources common stock per KCPL share, subject to
a collar mechanism, and one share of Westar Energy common stock per KCPL share.
Upon consummation of the combination, we will own approximately 80.1% of the
outstanding equity of Westar Energy and KCPL shareowners will own approximately
19.9%. As part of the combination, Westar Energy will assume all of the electric
utility related assets and liabilities of Western Resources, KCPL and KGE.
Westar Energy will assume $2.7 billion in debt, consisting of $1.9 billion
of indebtedness for borrowed money of Western Resources and KGE, and $800
million of debt of KCPL. Long-term debt of Western Resources and KGE was $2.1
billion at December 31,
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1997. Under the terms of the merger agreement, it is intended that we will be
released from our obligations with respect to our debt to be assumed by Westar
Energy.
Pursuant to the merger agreement, we have agreed, among other things, to
call for redemption all outstanding shares of our 4 1/2% Series Preferred Stock,
par value $100 per share, 4 1/4% Series Preferred Stock, par value $100 per
share, and 5% Series Preferred Stock, par value $100 per share.
Consummation of the merger is subject to customary conditions including
obtaining the approval of our and KCPL's shareowners and various regulatory
agencies. We estimate the transaction to close by mid-1999, subject to receipt
of all necessary approvals.
KCPL is a public utility company engaged in the generation, transmission,
distribution, and sale of electricity to customers in western Missouri and
eastern Kansas. We, KCPL and KGE have joint interests in certain electric
generating assets, including Wolf Creek. For additional information, see
"Financing in Item 1. Business" and Note 5 of "Notes to Consolidated Financial
Statements". Following the closing of the combination Westar Energy is expected
to have approximately one million electric utility customers in Kansas and
Missouri, approximately $8.2 billion in assets and the ability to generate more
than 8,000 megawatts of electricity.
On March 23, 1998 we and KCPL filed a letter informing the FERC that we
had signed a revised merger agreement, dated March 18, 1998. We sent similar
letters on March 24, 1998 to the KCC and the Missouri Public Service Commission
(MPSC). We and KCPL will submit appropriate modifications to our merger filings
at FERC, the KCC and the MPSC as soon as practicable.
As of December 31, 1997, we had spent and deferred on the Consolidated
Balance Sheet approximately $53 million in our efforts to acquire KCPL. We had
planned to expense these costs in the first period following the merger. We
reviewed the deferred costs and have determined that for accounting purposes,
$48 million of the deferred costs should be expensed. We recorded a special
non-recurring charge of $29 million after taxes, or $0.44 per share in December
1997, to expense the costs that were incurred solely as a result of the original
merger agreement. At December 31, 1997, we had deferred approximately $5 million
related to the KCPL transaction. See "Financial Condition" below and Note 5.
OTHER SECURITY ALARM MONITORING BUSINESS PURCHASES: We acquired Network
MultiFamily Security Corporation (Network Multi-Family), a security alarm
monitoring provider for multi-unit dwellings based in Dallas, Texas, for
approximately $171 million in cash in September 1997. On February 4, 1998,
Protection One exercised its option to acquire the stock of Network Holdings,
Inc., the parent company of Network Multi-Family, from us for approximately $180
million. We expect this transaction to occur in the first quarter of 1998. We
expect Protection One to borrow money from a revolving credit agreement provided
by Westar Capital, a subsidiary of Western Resources, to purchase Network
Multi-Family.
In November 1997, we acquired Centennial Security Holdings, Inc.
(Centennial) for approximately $94 million in cash. Centennial is based in
Madison, New Jersey and provides security alarm monitoring services to more than
50,000 customers in Ohio, Michigan, New Jersey, New York and Pennsylvania. We
contributed our Centennial security alarm monitoring business to Protection One
on November 24, 1997.
In March 1998, Protection One acquired the subscribers and assets of
Wichita, Kansas-based Multimedia Security Services, Inc. Multimedia Security
Services, Inc. has approximately 140,000 subscribers concentrated primarily in
California, Florida,
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Kansas, Oklahoma and Texas. We expect Protection One to borrow money from a
revolving credit agreement provided by Westar Capital to complete this
transaction.
OTHER INVESTMENTS: In December 1997, we invested $28 million to acquire an
interest in two 55-megawatt power plants in the People's Republic of China. We
invested approximately $3 million in power projects in the Republic of Turkey
and Colombia in 1997 (see Note 7). We also invested in other miscellaneous
investments.
ELECTRIC RATE DECREASE: On May 23, 1996, we reduced our electric rates to
KGE customers by $8.7 million annually on an interim basis. On October 22, 1996,
the KCC Staff, the City of Wichita, the Citizens Utility Ratepayer Board and we
filed an agreement asking the KCC to reduce our retail electric rates. The KCC
approved this agreement on January 15, 1997. Per the agreement:
- We made permanent the May 1996 interim $8.7 million decrease in KGE
rates on February 1, 1997
- We reduced KGE's rates by $36 million annually on February 1, 1997 - We
reduced KPL's rates by $10 million annually on February 1, 1997 - We
rebated $5 million to all of our electric customers in January 1998 - We
will reduce KGE's rates by $10 million more annually on June 1,
1998
- We will rebate $5 million to all of our electric customers in January
1999
- We will reduce KGE's rates by $10 million more annually on June 1,
1999
All rate decreases are cumulative. Rebates are one-time events and do not
influence future rates. See "Financial Condition" below and Note 8.
FINANCIAL CONDITION
1997 compared to 1996: Earnings increased to $489 million for 1997 from
$154 million for 1996, an improvement of 218%. Basic earnings per share rose to
$7.51 for 1997 compared to $2.41 for 1996, an increase of 212%. Basic earnings
per share is calculated based upon the average weighted number of common shares
outstanding during the period. There were no significant amounts of dilutive
securities outstanding at December 31, 1997 or 1996. Four factors primarily
affected 1997 earnings and basic earnings per share compared to 1996:
- The gain on the sale of the Tyco common stock increased earnings
before taxes by $864 million and basic earnings per share by $7.97
- The write-off of approximately $48 million in costs related to the
KCPL Merger decreased basic earnings per share by $0.44
- The operating results and special one-time charges from our first
full year of security alarm monitoring business reduced 1997
earnings by $47 million and basic earnings per share by $0.72
- Our reduced electric rates implemented on February 1, 1997 decreased
revenues by $46 million and basic earnings per share by $0.42
Dividends declared for 1997 increased four cents per common share to $2.10
per share. On January 29, 1998, the Board of Directors declared a dividend of 53
1/2 cents per common share for the first quarter of 1998, an increase of one
cent from the previous quarter.
Our book value per common share was $30.79 at December 31, 1997, compared
to $25.14 at December 31, 1996. The 1997 closing stock price of $43.00 was 140%
of book value and 39% higher than the closing price of $30.875 on December 31,
1996. Book value is
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the total common stock equity divided by the common shares outstanding at
December 31. There were 65,409,603 common shares outstanding at December 31,
1997.
1996 compared to 1995: Basic earnings per share were $2.41 based on
63,833,783 average common shares for 1996, a decrease from $2.71 in 1995. Net
income for 1996 decreased to $169 million from $182 million. The decrease in
basic earnings per share and net income is primarily due to the impact of an
$11.8 million or $0.19 per share charge, net of tax, attributable to one-time
restructuring and other charges recorded by ADT Limited (ADT). Abnormally cool
summer weather during the third quarter of 1996 and the $8.7 million electric
rate decrease to KGE customers also lowered earnings.
OPERATING RESULTS
In our "1997 Highlights", we discussed five factors that most
significantly changed our operating results for 1997 compared to 1996.
The following explains significant changes from prior year results in
revenues, cost of sales, operating expenses, other income (expense), interest
expense, income taxes and preferred and preference dividends.
After 1997, because of the ONEOK alliance, we will no longer separately
report natural gas operations financial information in our financial statements,
or in our Management's Discussion and Analysis. Also, we had minimal security
alarm monitoring business operations in 1995 and, therefore, we do not discuss
variations relating to it between 1996 and 1995.
SALES: Energy revenues include electric revenues, power marketing
revenues, natural gas revenues and other insignificant energy-related revenues.
Certain state regulatory commissions and the FERC authorize rates for our
electric revenues. Our energy revenues vary with levels of sales volume.
Changing weather affects the amount of energy our customers use. Very hot
summers and very cold winters prompt more demand, especially among our
residential customers. Mild weather reduces demand.
Many things will affect our future energy sales. They include:
- The weather
- Our electric rates
- Competitive forces
- Customer conservation efforts
- Wholesale demand
- The overall economy of our service area
1997 compared to 1996: Electric revenues increased three percent because
of revenues of $70 million from the expansion of power marketing activity in
1997. Our involvement in electric power marketing anticipates a deregulated
electric utility industry. We are involved in both the marketing of electricity
and risk management services to wholesale electric customers and the purchase of
electricity for our retail customers. Our margin from power marketing activity
is significantly less than our margins on other energy sales. Our power
marketing activity has resulted in energy purchases and sales made in areas
outside of our historical marketing territory. In 1997, this additional power
marketing activity had an insignificant effect on operating income. Higher
electric revenues from power marketing were offset by our reduced electric rates
implemented February 1, 1997. Reduced electric rates lowered 1997 revenues by an
estimated $46 million compared to 1996. The rate decreases we have agreed to
make will impact future revenues.
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Natural gas revenues decreased $58 million or seven percent in 1997
compared to 1996 because we transferred our net natural gas business assets to
ONEOK as of November 30, 1997 and we had warmer than normal weather in the first
quarter of 1997. In December 1997, we began reporting investment income for
ONEOK based upon our common and preferred equity interests.
Security alarm monitoring business revenues increased $144 million from
our minimal 1996 security alarm monitoring business revenues. This increase is
because of our December 30, 1996, purchase of the net assets of Westinghouse
Security Systems, Inc. (Westinghouse Security Systems) and our acquisition on
November 24, 1997, of approximately 82.4% of Protection One. As a result, we
have included a full year of operating results from Westinghouse Security
Systems and one month of operating results from Protection One. See "1997
Highlights" above and Note 3.
1996 compared to 1995: Electric revenues were five percent higher in 1996
compared to 1995. Our service territory experienced colder winter and warmer
spring temperatures during the first six months of 1996 compared to 1995, which
yielded higher sales in the residential and commercial customer classes. We
experienced a 17% increase in heating degree days during the first quarter of
1996 and had double the cooling degree days during the second quarter of 1996
compared to the same periods in 1995. Partially offsetting the increase in
electric revenues was abnormally cool summer weather during the third quarter of
1996 compared to 1995 and a KCC-ordered electric rate decrease of $8.7 million
for KGE customers (see Note 8).
Colder winter temperatures, higher natural gas costs passed on to
customers as permitted by the KCC and more as-available natural gas sales
increased regulated natural gas revenues 29% for 1996 as compared to 1995. The
natural gas revenue increase approved by the KCC on July 11, 1996, raised
regulated natural gas revenues $14 million for the last six months of 1996.
COST OF SALES: Items included in energy cost of sales are fuel expense,
purchased power expense (electricity we purchase from others for resale), power
marketing expense and natural gas purchased. Items included in security alarm
monitoring cost of sales are the cost of direct monitoring and the cost of
installing security monitoring equipment that is not capitalized.
1997 compared to 1996: Energy business cost of sales was $49 million or
six percent higher. Our power marketing activity in 1997 increased energy cost
of sales by $70 million.
Actual cost of fuel to generate electricity (coal, nuclear fuel, natural
gas or oil) and the amount of power purchased from other utilities were $14
million higher in 1997 than in 1996. Our Wolf Creek nuclear generating station
was off-line in the fourth quarter of 1997 for scheduled maintenance and our La
Cygne coal generation station was off-line during 1997 for an extended
maintenance outage. As a result, we burned more natural gas to generate
electricity at our facilities. Natural gas is more costly to burn than coal and
nuclear fuel for generating electricity.
Railroad transportation limitations prevented scheduled fuel deliveries,
reducing our coal inventories. To compensate for low coal inventories, we
purchased more power from other utilities and burned more expensive natural gas
to meet our energy requirements. We also purchased more power from other
utilities because our Wolf Creek and La Cygne generating stations were not
generating electricity for parts of 1997.
Due to the contribution of our natural gas business to ONEOK, our natural
gas cost of sales decreased $24 million. We will no longer reflect such costs in
our financial statements.
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The security alarm monitoring cost of sales increased $35 million. The
increase is a result of the purchase of the assets of Westinghouse Security
Systems on December 30, 1996, and our acquisition on November 24, 1997, of
approximately 82.4% of Protection One.
1996 compared to 1995: Energy business cost of sales was $220 million
higher in 1996 than 1995. We purchased more power from other utilities because
our Wolf Creek nuclear generating station was off-line in the first quarter of
1996 for a planned refueling outage. Higher net generation due to warmer weather
and higher customer demand for air conditioning during the second quarter of
1996 also contributed to the higher fuel and purchased power expenses.
Security alarm monitoring cost of sales increased $4 million due to the
purchases of several small security alarm monitoring companies.
OPERATING EXPENSES
OPERATING AND MAINTENANCE EXPENSE: Operating and maintenance expense
increased slightly from 1996 to 1997. Operating and maintenance expense
increased $23 million or six percent from 1995 to 1996 due to expenses
associated with our regulated natural gas transmission service provider, Mid
Continent Market Center.
DEPRECIATION AND AMORTIZATION EXPENSE: The amortization of capitalized
security alarm monitoring accounts and goodwill for our security alarm
monitoring business increased our depreciation and amortization expense
approximately $41 million for 1997 versus 1996. A full year of amortization of
the acquisition adjustment for the 1992 acquisition of KGE increased our
depreciation and amortization expense for 1996 compared to 1995 by approximately
$14 million.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE: Selling, general and
administrative expense has increased $113 million from 1996 to 1997. Higher
employee benefit costs of approximately $30 million and higher security alarm
monitoring business selling, general and administrative expense of approximately
$83 million caused this increase. The security alarm monitoring business
increase is because of our December 30, 1996, purchase of the assets of
Westinghouse Security Systems and our acquisition on November 24, 1997, of
approximately 82.4% of Protection One.
OTHER: We recorded a special non-recurring charge in December 1997 to
expense $48 million of deferred KCPL Merger costs.
Protection One recorded a special non-recurring charge of approximately
$40 million in December 1997, to reflect the phase out of certain business
activities which are no longer of continuing value to Protection One, to
eliminate redundant facilities and activities and to bring all customers under
the Protection One brand.
OTHER INCOME (EXPENSE): Other income (expense) includes miscellaneous
income and expenses not directly related to our operations. The gain on the sale
of Tyco common stock increased other income $864 million for 1997 compared to
1996. Other income (expense) decreased slightly from 1995 to 1996.
INTEREST EXPENSE: Interest expense includes the interest we paid on
outstanding debt. We recognized $27 million more short-term debt interest in
1997 than in 1996. Average short-term debt balances were higher in 1997 than
1996 because we used short-term debt to finance our investment in ADT and to
purchase the assets of Westinghouse Security Systems. Short-term debt interest
expense declined in the second half of 1997 after we used the proceeds from the
sale of Tyco common stock and a long-term debt
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financing to reduce our short-term debt balance. From December 31, 1996, to
December 31, 1997, our short-term debt balance decreased $744 million. From 1996
to 1997, interest recorded on long-term debt increased $14 million or 13% due to
the issuance of $520 million in senior unsecured notes.
We had $16 million more in interest expense on short-term and other debt
in 1996 than in 1995 because we used short-term debt to finance our investment
in ADT and we issued Western Resources obligated mandatorily redeemable
preferred securities of subsidiary trusts.
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We also recognized $10 million more long-term debt interest in 1996 compared to
1995 due to a higher revolving credit agreement balance.
INCOME TAXES: Income taxes on the gain from the sale of Tyco common stock
increased total income tax expense by approximately $345 million for 1997
compared to 1996.
Income taxes did not vary significantly from 1995 to 1996.
PREFERRED AND PREFERENCE DIVIDENDS: We redeemed all of our 8.50%
preference stock due 2016 on July 1, 1996; therefore, 1997 preferred and
preference dividends were $10 million lower compared to 1996. Preferred and
preference dividends varied slightly from 1995 to 1996.
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW: Most of our cash requirements consist of capital expenditures
and maintenance costs associated with the electric utility business, continued
growth in the security alarm monitoring business, payment of common stock
dividends and investments in foreign power projects. Our ability to attract
necessary financial capital on reasonable terms is critical to our overall
business plan. Historically, we have paid for acquisitions with cash on hand, or
the issuance of stock or short-term debt. Our ability to provide the cash, stock
or debt to fund our capital expenditures depends upon many things, including
available resources, our financial condition and current market conditions.
As of December 31, 1997, we had $77 million in cash and cash equivalents.
We consider highly liquid debt instruments purchased with a maturity of three
months or less to be cash equivalents. Our cash and cash equivalents increased
$73 million from December 31, 1996, due to cash held by Protection One. Other
than operations, our primary source of short-term cash is from short-term bank
loans, unsecured lines of credit and the sale of commercial paper. At December
31, 1997, we had approximately $237 million of short-term debt outstanding, of
which $76 million was commercial paper. An additional $773 million of short-term
debt was available from committed credit arrangements.
Other funds are available to us from the sale of securities we register
for sale with the SEC. As of December 31, 1997, these included $30 million of
Western Resources first mortgage bonds which may also be issued as unsecured
senior notes at our option, $50 million of KGE first mortgage bonds and
approximately 11 million Western Resources common shares.
Our embedded cost of long-term debt was 7.5% at December 31, 1997, a drop
of 0.1% from December 31, 1996.
CASH FLOWS FROM OPERATING ACTIVITIES: Cash provided by operations declined
$355 million from 1996 primarily due to income taxes paid on the gain on the
sale of Tyco stock. Individual items of working capital will vary with our
normal business cycles and operations, including the timing of receipts and
payments. Amortization of goodwill and subscriber accounts associated with the
security alarm monitoring business increased, because security alarm monitoring
operations were small during 1996.
CASH FLOWS FROM INVESTING ACTIVITIES: Cash used in investing activities
varies with the timing of capital expenditures, acquisitions and investments.
For 1997, we had positive net cash flow from investing activities because of the
receipt of approximately $1.5 billion in proceeds on the sale of Tyco common
stock.
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We had two significant investing activities during 1997 which partially
offset the proceeds from the sale of the Tyco common stock. We invested $484
million to acquire security alarm monitoring companies and accounts. We also
invested approximately $31 million in international power projects in the
People's Republic of China, the Republic of Turkey and Colombia.
CASH FLOWS FROM FINANCING ACTIVITIES: We paid off $275 million borrowed
under a multi-year revolving credit agreement with short-term debt in the first
quarter of 1997.
In August 1997, we issued $520 million in convertible first mortgage
bonds. We used the proceeds, after expenses, to reduce short-term debt. In
November 1997, we converted the first mortgage bonds into unsecured senior notes
having the same principal amount, interest rate and maturity date as the first
mortgage bonds. This conversion satisfied mortgage requirements to retire bonds
in order to release our natural gas properties from the mortgage and contribute
them to ONEOK (see Note 15).
We used a portion of the proceeds from the sale of Tyco common stock to
reduce short-term debt. In aggregate, our short-term debt has declined from $981
million at December 31, 1996, to $237 million at December 31, 1997.
On February 27, 1998, we sent a notice of redemption to the holders of our
7.58% Preference Stock due 2007. On April 1, 1998, we will redeem this stock at
a premium, including dividends, for $53 million.
CAPITAL STRUCTURE: Our capital structures at December 31, 1997, and 1996
were as follows:
1997 1996
Common stock 45% 45%
Preferred and preference stock 2% 2%
Western Resources obligated
mandatorily redeemable preferred
securities of subsidiary trust holding
solely company subordinated debentures 5% 6%
Long-term debt 48% 47%
---- ----
Total 100% 100%
SECURITY RATINGS: Standard & Poor's Ratings Group (S&P), Fitch Investors
Service (Fitch) and Moody's Investors Service (Moody's) are independent
credit-rating agencies. These agencies rate our debt securities. These ratings
indicate the agencies' assessment of our ability to pay interest and principal
on these securities. These ratings affect how much we will have to pay as
interest securities we sell to obtain additional capital. The better the rating,
the less we will have to pay on debt securities we sell.
At December 31, 1997, ratings with these agencies were as follows:
Kansas Gas
Western Western and Electric
Resources' Resources' Company's
Mortgage Short-term Mortgage
Bond Debt Bond
Rating Agency Rating Rating Rating
------------- ---------- ---------- ---------
S&P A- A-2 BBB+
Fitch A- F-2 A-
Moody's A3 P-2 A3
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Following the announcement of our restructured merger agreement with KCPL,
S&P placed its ratings of Western Resources and KGE bonds on CreditWatch with
positive implications. Moody's changed the direction of its ongoing review of
Western Resources' debt rating from possible downgrade to possible upgrade.
FUTURE CASH REQUIREMENTS: We believe that internally generated funds and
new and existing credit agreements will be sufficient to meet our operating and
capital expenditure requirements, debt service and dividend payments through the
year 2000. Uncertainties affecting our ability to meet these requirements with
internally generated funds include the effect of competition and inflation on
operating expenses, sales volume, regulatory actions, compliance with future
environmental regulations, the availability of generating units and weather. The
amount of these requirements and our ability to fund them will also be
significantly impacted by the pending combination of our electric utility
operations with KCPL.
We believe that we will meet the needs of our electric utility customers
without adding any major generation facilities in the next five years.
Our business requires a significant capital investment. We currently
expect that through the year 2000, we will need cash mostly for:
- Ongoing utility construction and maintenance program designed to
maintain and improve facilities providing electric service
- Growth within the security alarm monitoring business, including
acquisition of subscriber accounts
- Investment opportunities in international power development projects
and generation facilities
- Expansion of our nonregulated operations
Capital expenditures for 1997 and anticipated capital expenditures for
1998 through 2000 are as follows:
Security
Alarm
Electric Monitoring International Other Total
(Dollars in Thousands)
1997. . . . . $159,800 $ 45,200 $30,500 $17,300 $252,800
1998. . . . . 142,000 216,900 52,500 41,700 453,100
1999. . . . . 121,400 263,200 79,200 11,700 475,500
2000. . . . . 137,800 280,800 9,200 800 428,600
Capital expenditures in 1997 included an additional $47 million in
improvements to our natural gas system. Because we contributed our natural gas
business net assets to ONEOK, we will not incur any direct capital expenditures
related to that business in future years.
"Electric" capital expenditures include the cost of nuclear fuel.
"Security Alarm Monitoring" capital expenditures include anticipated
acquisitions of subscriber accounts.
"International" expenditures include commitments to international power
development projects and generation facilities. "Other" primarily represents our
commitments to our Affordable Housing Tax Credit program (AHTC). See discussion
in "Other Information" below.
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These estimates are prepared for planning purposes and may be revised (see
Note 7). Electric expenditures shown in the table above do not take into account
the pending combination of our electric utility operations with KCPL (see Note
5).
Bond maturities and preference stock sinking fund requirements will
require cash of approximately $303 million through the year 2002. Protection One
is required to retire long-term debt of approximately $63 million through 1999.
Our currently authorized quarterly dividend of 53 1/2 cents per common
share or $2.14 on an annual basis is paid from our earnings. The payment of
dividends is at the discretion of our board of directors. Each quarter, the
board makes a determination on the amount of dividends to declare, considering
such matters as future earnings expectations and our financial condition.
OTHER INFORMATION
COMPETITION AND ENHANCED BUSINESS OPPORTUNITIES: The United States
electric utility industry is evolving from a regulated monopolistic market to a
competitive marketplace. The 1992 Energy Policy Act began deregulating the
electricity industry. The Energy Policy Act permitted the FERC to order electric
utilities to allow third parties the use of their transmission systems to sell
electric power to wholesale customers. A wholesale sale is defined as a utility
selling electricity to a "middleman", usually a city or its utility company, to
resell to the ultimate retail customer. As part of the 1992 KGE merger, we
agreed to open access of our transmission system for wholesale transactions.
FERC also requires us to provide transmission services to others under terms
comparable to those we provide to ourselves. During 1997, wholesale electric
revenues represented approximately 12% of total electric revenues.
Various states have taken steps to allow retail customers to purchase
electric power from providers other than their local utility company. The Kansas
Legislature has created a Retail Wheeling Task Force (the Task Force) to study
the effects of a deregulated and competitive market for electric services.
Legislators, regulators, consumer advocates and representatives from the
electric industry make up the Task Force. The Task Force submitted a bill to the
Kansas Legislature without recommendation. This bill seeks competitive retail
electric service on July 1, 2001. The bill was introduced to the Kansas
Legislature in the opening days of the 1998 legislative session, but is not
expected to come to a vote this year. The Task Force also is evaluating how to
recover certain investments in generation and related facilities which were
approved and incurred under the existing regulatory model. Some of these
investments may not be recoverable in a competitive marketplace. We have opposed
the Task Force's bill for this reason. These unrecovered investments are
commonly called "stranded costs." See "Stranded Costs" below for further
discussion. Until a bill is passed by the Kansas Legislature, we cannot predict
its impact on our company, but the impact could be material.
We believe successful providers of energy in a deregulated market will
provide energy-related services. We believe consumers will demand innovative
options and insist on efficient products and services to meet their
energy-related needs. We believe that our strong core utility business provides
a platform to offer the efficient energy products and services that customers
will desire. We continue to seek new ways to add value to the lives and
businesses of our customers. We recognize that our current customer base must
expand beyond our existing service area. We view every person in the United
States and abroad as a potential customer.
Increased competition for retail electricity sales may reduce future
electric utility earnings compared to our historical electric utility earnings.
After all
37
<PAGE>
electric rate decreases are implemented, our rates will range from 73% to 91% of
the national average for retail customers. Because of these reduced rates, we
expect to retain a substantial part of our current sales volume in a competitive
environment. Finally, we believe the deregulated energy market may prove
beneficial to us. We also plan to compensate for competitive pressure in our
current regulated business with the nationwide security alarm monitoring
services we offer to customers.
While operating in this competitive environment may place pressure on our
profit margins, common dividends and credit ratings, we expect it to create
opportunities. Wholesale and industrial customers may pursue cogeneration,
self-generation, retail wheeling, municipalization or relocation to other
service territories in an attempt to cut their energy costs. Credit rating
agencies are applying more stringent guidelines when rating utility companies
due to increasing competition.
We offer competitive electric rates for industrial improvement projects
and economic development projects in an effort to maintain and increase electric
load.
In light of competitive developments, we are pursuing the following
strategic plan:
- Maintain a strong core energy business - Build a national branded
presence - Create value through energy-related investments
To better position ourselves for the competitive energy environment, we
have consummated a strategic alliance with ONEOK (see Note 4), have acquired a
controlling interest in Protection One (see Note 3) and continue to develop
international power projects.
STRANDED COSTS: The definition of stranded costs for a utility business is
the investment in and carrying costs on property, plant and equipment and other
regulatory assets which exceed the amount that can be recovered in a competitive
market. We currently apply accounting standards that recognize the economic
effects of rate regulation and record regulatory assets and liabilities related
to our generation, transmission and distribution operations. If we determine
that we no longer meet the criteria of Statement of Financial Accounting
Standards No. 71, "Accounting for the Effects of Certain Types of Regulation"
(SFAS 71), we may have a material extraordinary non-cash charge to operations.
Reasons for discontinuing SFAS 71 accounting treatment include increasing
competition that restricts our ability to charge prices needed to recover costs
already incurred and a significant change by regulators from a cost-based rate
regulation to another form of rate regulation. We periodically review SFAS 71
criteria and believe our net regulatory assets, including those related to
generation, are probable of future recovery. If we discontinue SFAS 71
accounting treatment based upon competitive or other events, we may
significantly impact the value of our net regulatory assets and our utility
plant investments, particularly the Wolf Creek facility. See "Competition and
Enhanced Business Opportunities" above for initiatives taken to restructure the
electric industry in Kansas.
Regulatory changes, including competition, could adversely impact our
ability to recover our investment in these assets. As of December 31, 1997, we
have recorded regulatory assets which are currently subject to recovery in
future rates of approximately $380 million. Of this amount, $213 million is a
receivable for income tax benefits previously passed on to customers. The
remainder of the regulatory assets are items that may give rise to stranded
costs including coal contract settlement costs, deferred employee benefit costs,
deferred plant costs and debt issuance costs.
In a competitive environment, we may not be able to fully recover our
entire investment in Wolf Creek. We presently own 47% of Wolf Creek. Our
ownership would
38
<PAGE>
increase to 94% when the KCPL combination is completed. We also may have
stranded costs from an inability to recover our environmental remediation costs
and long-term fuel contract costs in a competitive environment. If we determine
that we have stranded costs and we cannot recover our investment in these
assets, our future net utility income will be lower than our historical net
utility income has been unless we compensate for the loss of such income with
other measures.
YEAR 2000 ISSUE: We are currently addressing the effect of the Year 2000
Issue on our reporting systems and operations. We face the Year 2000 Issue
because many computer systems and applications abbreviate dates by eliminating
the first two digits of the year, assuming that these two digits are always
"19". On January 1, 2000, some computer programs may incorrectly recognize the
date as January 1, 1900. Some computer systems may incorrectly process critical
financial and operational information, or stop processing altogether because of
the date abbreviation. Calculations using the year 2000 will affect computer
applications before January 1, 2000.
We have recognized the potential adverse effects the Year 2000 Issue could
have on our company. In 1996, we established a formal Year 2000 remediation
program to investigate and correct these problems in the main computer systems
of our company. In 1997, we expanded the program to include all business units
and departments of our company. The goal of our program is to identify and
assess every critical system potentially affected by the Year 2000 date change
and to repair or replace those systems found to be incompatible with Year 2000
dates.
We plan to have our Year 2000 readiness efforts substantially completed by
the end of 1998. We expect no significant operational impact on our ability to
serve our customers, pay suppliers, or operate other areas of our business.
We currently estimate that total costs to update all of our systems for
year 2000 compliance will be approximately $7 million. In 1997, we expensed
approximately $3 million of these costs and based on what we now know, we expect
to incur about $4 million in 1998 to complete our efforts.
There can be no assurance, however, that our suppliers will not be
affected by the Year 2000 Issue which could affect our operations.
AFFORDABLE HOUSING TAX CREDIT PROGRAM: We have received authorization from
the KCC to invest up to $114 million in AHTC investments. An example of an AHTC
project is housing for residents who are elderly or meet certain income
requirements. At December 31, 1997, the company had invested approximately $17
million to purchase limited partnership interests. We are committed to investing
approximately $55 million more in AHTC investments by January 1, 2000. These
investments are accounted for using the equity method of accounting. Based upon
an order received from the KCC, income generated from the AHTC investments,
primarily tax credits, will be used to offset costs associated with
postretirement and postemployment benefits offered to our employees. Tax credits
are recognized in the year generated.
DECOMMISSIONING: Decommissioning is a nuclear industry term for the
permanent shutdown of a nuclear power plant when the plant's license expires.
The Nuclear Regulatory Commission (NRC) will terminate a plant's license and
release the property for unrestricted use when a company has reduced the
residual radioactivity of a nuclear plant to a level mandated by the NRC. The
NRC requires companies with nuclear power plants to prepare formal financial
plans. These plans ensure that funds required for decommissioning will be
accumulated during the estimated remaining life of the related nuclear power
plant.
39
<PAGE>
The SEC staff has questioned the way electric utilities recognize, measure
and classify decommissioning costs for nuclear electric generating stations in
their financial statements. In response to the SEC's questions, the Financial
Accounting Standards Board is reviewing the accounting for closure and removal
costs, including decommissioning of nuclear power plants. If current accounting
practices for nuclear power plant decommissioning are changed, the following
could occur:
- Our annual decommissioning expense could be higher than in 1997 - The
estimated cost for decommissioning could be recorded as a
liability (rather than as accumulated depreciation)
- The increased costs could be recorded as additional investment in the
Wolf Creek plant
We do not believe that such changes, if required, would adversely affect
our operating results due to our current ability to recover decommissioning
costs through rates. (See Note 7).
REGULATORY ISSUES: On November 27, 1996, the KCC issued a Suspension Order
and on December 3, 1996, the KCC issued an order which suspended, subject to
refund, the collection of costs related to purchases from Kansas Pipeline
Partnership included in our cost of natural gas. On November 25, 1997, the KCC
issued its order lifting the suspension and closing the docket.
PRONOUNCEMENT ISSUED BUT NOT YET EFFECTIVE: In January 1998, the company
adopted Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" (SFAS 131). This statement
establishes standards for public business enterprises to report information
about operating segments in interim and annual financial statements. Interim
disclosure requirements are not required until 1999. Operating segments are
defined as components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and assess performance.
Adoption of the disclosure requirements of SFAS 131 will impact the presentation
of the company's business segments.
40
<PAGE>
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
41
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
TABLE OF CONTENTS PAGE
Report of Independent Public Accountants 39
Financial Statements:
Consolidated Balance Sheets, December 31, 1997 and 1996 40
Consolidated Statements of Income for the years ended
December 31, 1997, 1996 and 1995 41
Consolidated Statements of Cash Flows for the years ended
1997, 1996 and 1995 42
Consolidated Statements of Cumulative Preferred and
Preference Stock, December 31, 1997 and 1996 43
Consolidated Statements of Common Shareowners' Equity for
the years ended December 31, 1997, 1996 and 1995 44
Notes to Consolidated Financial Statements 45
SCHEDULES OMITTED
The following schedules are omitted because of the absence of the
conditions under which they are required or the information is included in the
financial statements and schedules presented:
I, II, III, IV, and V.
42
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareowners and Board of Directors
of Western Resources, Inc.:
We have audited the accompanying consolidated balance sheets and
statements of cumulative preferred and preference stock of Western Resources,
Inc., and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of income, cash flows, and common shareowners' equity
for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Western
Resources, Inc., and subsidiaries as of December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Kansas City, Missouri,
January 29, 1998
(March 24, 1998 with respect to Note 5 of the Notes to Consolidated Financial
Statements.)
43
<PAGE>
<TABLE>
<CAPTION>
WESTERN RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
December 31,
1997 1996
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . . . . . . . . $ 76,608 $ 3,724
Accounts receivable (net) . . . . . . . . . . . . . . . . 325,043 318,966
Inventories and supplies (net). . . . . . . . . . . . . . 86,398 135,255
Marketable securities . . . . . . . . . . . . . . . . . . 75,258 -
Prepaid expenses and other. . . . . . . . . . . . . . . . 25,483 36,503
---------- ----------
Total Current Assets. . . . . . . . . . . . . . . . . . 588,790 494,448
---------- ----------
PROPERTY, PLANT AND EQUIPMENT, NET. . . . . . . . . . . . . 3,786,528 4,384,017
---------- ----------
OTHER ASSETS:
Investment in ADT . . . . . . . . . . . . . . . . . . . . - 590,102
Investment in ONEOK . . . . . . . . . . . . . . . . . . . 596,206 -
Subscriber accounts . . . . . . . . . . . . . . . . . . . 549,152 265,530
Goodwill (net). . . . . . . . . . . . . . . . . . . . . . 854,163 225,892
Regulatory assets . . . . . . . . . . . . . . . . . . . . 380,421 458,296
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 221,700 229,496
---------- ----------
Total Other Assets. . . . . . . . . . . . . . . . . . . 2,601,642 1,769,316
---------- ----------
TOTAL ASSETS. . . . . . . . . . . . . . . . . . . . . . . . $6,976,960 $6,647,781
---------- ----------
LIABILITIES AND SHAREOWNERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt. . . . . . . . . . . $ 21,217 $ -
Short-term debt . . . . . . . . . . . . . . . . . . . . . 236,500 980,740
Accounts payable. . . . . . . . . . . . . . . . . . . . . 151,166 180,540
Accrued liabilities . . . . . . . . . . . . . . . . . . . 249,447 140,204
Accrued income taxes. . . . . . . . . . . . . . . . . . . 27,360 27,053
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 89,106 23,555
----------- ----------
Total Current Liabilities . . . . . . . . . . . . . . . 774,796 1,352,092
----------- ----------
LONG-TERM LIABILITIES:
Long-term debt (net). . . . . . . . . . . . . . . . . . . 2,181,855 1,681,583
Western Resources obligated mandatorily redeemable
preferred securities of subsidiary trusts holding
solely company subordinated debentures. . . . . . . . . 220,000 220,000
Deferred income taxes and investment tax credits. . . . . 1,065,565 1,235,900
Minority interests. . . . . . . . . . . . . . . . . . . . 164,379 -
Deferred gain from sale-leaseback . . . . . . . . . . . . 221,779 233,060
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 259,521 225,608
---------- ----------
Total Long-term Liabilities . . . . . . . . . . . . . . 4,113,099 3,596,151
---------- ----------
COMMITMENTS AND CONTINGENCIES
SHAREOWNERS' EQUITY:
Cumulative preferred and preference stock . . . . . . . . 74,858 74,858
Common stock, par value $5 per share, authorized
85,000,000 shares, outstanding 65,409,603 and
64,625,259 shares, respectively . . . . . . . . . . . . 327,048 323,126
Paid-in capital . . . . . . . . . . . . . . . . . . . . . 760,553 739,433
Retained earnings . . . . . . . . . . . . . . . . . . . . 914,487 562,121
Net change in unrealized gain on equity securities (net). 12,119 -
---------- -------
Total Shareowners' Equity . . . . . . . . . . . . . . . 2,089,065 1,699,538
---------- ----------
TOTAL LIABILITIES & SHAREOWNERS' EQUITY . . . . . . . . . . $6,976,960 $6,647,781
---------- ----------
The Notes to Consolidated Financial Statements are an integral part of this
statement.
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
WESTERN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, Except Per Share Amounts)
Year Ended December 31,
1997 1996 1995
<S> <C> <C> <C>
SALES:
Energy. . . . . . . . . . . . . . . . . . . . . . . . $1,999,418 $2,038,281 $1,743,930
Security. . . . . . . . . . . . . . . . . . . . . . . 152,347 8,546 344
---------- ---------- ----------
Total Sales . . . . . . . . . . . . . . . . . . . . 2,151,765 2,046,827 1,744,274
---------- ---------- ----------
COST OF SALES:
Energy. . . . . . . . . . . . . . . . . . . . . . . . 928,324 879,328 658,935
Security. . . . . . . . . . . . . . . . . . . . . . . 38,800 3,798 68
---------- ---------- ----------
Total Cost of Sales . . . . . . . . . . . . . . . . 967,124 883,126 659,003
---------- ---------- ----------
GROSS PROFIT. . . . . . . . . . . . . . . . . . . . . . 1,184,641 1,163,701 1,085,271
---------- ---------- ----------
OPERATING EXPENSES:
Operating and maintenance expense . . . . . . . . . . 383,912 374,369 351,589
Depreciation and amortization . . . . . . . . . . . . 256,725 201,331 177,830
Selling, general and administrative expense . . . . . 312,927 199,448 182,131
Write-off of deferred merger costs. . . . . . . . . . 48,008 - -
Security asset impairment charge. . . . . . . . . . . 40,144 - -
---------- ---------- -------
Total Operating Expenses. . . . . . . . . . . . . . 1,041,716 775,148 711,550
---------- ---------- ----------
INCOME FROM OPERATIONS. . . . . . . . . . . . . . . . . 142,925 388,553 373,721
---------- ---------- ----------
OTHER INCOME (EXPENSE):
Gain on sale of Tyco securities . . . . . . . . . . . 864,253 - -
Special charges from ADT. . . . . . . . . . . . . . . - (18,181) -
Investment earnings . . . . . . . . . . . . . . . . . 25,646 20,647 -
Minority interest . . . . . . . . . . . . . . . . . . 4,737 - -
Other . . . . . . . . . . . . . . . . . . . . . . . . 28,403 12,841 18,657
---------- ---------- ----------
Total Other Income (Expense). . . . . . . . . . . . 923,039 15,307 18,657
---------- ---------- ----------
INCOME BEFORE INTEREST AND TAXES. . . . . . . . . . . . 1,065,964 403,860 392,378
---------- ---------- ----------
INTEREST EXPENSE:
Interest expense on long-term debt. . . . . . . . . . 119,389 105,741 95,962
Interest expense on short-term debt and other . . . . 73,836 46,810 30,360
---------- ---------- ----------
Total Interest Expense. . . . . . . . . . . . . . . 193,225 152,551 126,322
---------- ---------- ----------
INCOME BEFORE INCOME TAXES. . . . . . . . . . . . . . . 872,739 251,309 266,056
---------- ---------- ----------
INCOME TAXES. . . . . . . . . . . . . . . . . . . . . . 378,645 82,359 84,380
---------- ---------- ----------
NET INCOME. . . . . . . . . . . . . . . . . . . . . . . 494,094 168,950 181,676
---------- ---------- ----------
PREFERRED AND PREFERENCE DIVIDENDS. . . . . . . . . . . 4,919 14,839 13,419
---------- ---------- ----------
EARNINGS AVAILABLE FOR COMMON STOCK . . . . . . . . . . $ 489,175 $ 154,111 $ 168,257
---------- ---------- ----------
AVERAGE COMMON SHARES OUTSTANDING . . . . . . . . . . . 65,127,803 63,833,783 62,157,125
BASIC EARNINGS PER AVERAGE COMMON SHARE OUTSTANDING . . $ 7.51 $ 2.41 $ 2.71
DIVIDENDS DECLARED PER COMMON SHARE . . . . . . . . . . $ 2.10 $ 2.06 $ 2.02
The Notes to Consolidated Financial Statements are an integral part of this
statement.
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
WESTERN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
Year ended December 31,
1997 1996 1995
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income. . . . . . . . . . . . . . . . . . . . . . . . $ 494,094 $ 168,950 $ 181,676
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . . 256,725 201,331 177,830
Gain on sale of securities. . . . . . . . . . . . . . . . (864,253) - -
Equity in earnings from investments . . . . . . . . . . . (25,405) (9,373) -
Write-off of deferred merger costs. . . . . . . . . . . . 48,008 - -
Security asset impairment charge. . . . . . . . . . . . . 40,144 - -
Changes in working capital items (net of effects from acquisitions):
Accounts receivable, net. . . . . . . . . . . . . . . . 14,156 (47,474) (37,532)
Inventories and supplies. . . . . . . . . . . . . . . . 3,249 10,624 (715)
Marketable securities . . . . . . . . . . . . . . . . . (10,461) - -
Prepaid expenses and other. . . . . . . . . . . . . . . 9,230 (14,900) 6,958
Accounts payable. . . . . . . . . . . . . . . . . . . . (48,298) 15,353 18,578
Accrued liabilities . . . . . . . . . . . . . . . . . . 65,071 10,261 (5,079)
Accrued income taxes. . . . . . . . . . . . . . . . . . 9,869 26,377 (14,209)
Other . . . . . . . . . . . . . . . . . . . . . . . . . (8,584) (4,824) (28,642)
Changes in other assets and liabilities . . . . . . . . . (69,353) (87,285) 5,134
---------- ---------- ----------
Net cash flows (used in) from operating activities. . . (85,808) 269,040 303,999
---------- ---------- ----------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Additions to property, plant and equipment (net). . . . . 210,738 195,602 232,252
Customer account acquisitions . . . . . . . . . . . . . . 45,163 - -
Proceeds from sale of securities. . . . . . . . . . . . . (1,533,530) - -
Security alarm monitoring acquisitions,
net of cash acquired. . . . . . . . . . . . . . . . . . 438,717 368,535 -
Purchase of ADT common stock. . . . . . . . . . . . . . . - 589,362 -
Other investments (net) . . . . . . . . . . . . . . . . . 45,318 6,563 15,408
---------- ---------- ----------
Net cash flows (from) used in investing activities. . . (793,594) 1,160,062 247,660
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term debt (net) . . . . . . . . . . . . . . . . . . (744,240) 777,290 (104,750)
Proceeds of long-term debt. . . . . . . . . . . . . . . . 520,000 225,000 50,000
Retirements of long-term debt . . . . . . . . . . . . . . (293,977) (16,135) (105)
Issuance of other mandatorily redeemable securities . . . - 120,000 100,000
Issuance of common stock (net). . . . . . . . . . . . . . 25,042 33,212 36,161
Redemption of preference stock. . . . . . . . . . . . . . - (100,000) -
Cash dividends paid . . . . . . . . . . . . . . . . . . . (141,727) (147,035) (137,946)
---------- ---------- ----------
Net cash flows (used in) from financing activities. . . (634,902) 892,332 (56,640)
---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS. . . . 72,884 1,310 (301)
CASH AND CASH EQUIVALENTS:
Beginning of the period . . . . . . . . . . . . . . . . . 3,724 2,414 2,715
---------- ---------- ----------
End of the period . . . . . . . . . . . . . . . . . . . . $ 76,608 $ 3,724 $ 2,414
========== ========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
CASH PAID FOR:
Interest on financing activities (net of amount
capitalized). . . . . . . . . . . . . . . . . . . . . . $ 193,468 $ 170,635 $ 136,526
Income taxes. . . . . . . . . . . . . . . . . . . . . . . 404,548 66,692 84,811
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During 1997, the company contributed the net assets of its natural gas
business totaling approximately $594 million to ONEOK in exchange for an
ownership interest of 45% in ONEOK.
The Notes to Consolidated Financial Statements are an integral part of this
statement.
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
WESTERN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CUMULATIVE PREFERRED AND PREFERENCE STOCK
(Dollars in Thousands)
December 31,
1997 1996
<S> <C> <C>
CUMULATIVE PREFERRED AND PREFERENCE STOCK:
Preferred stock not subject to mandatory redemption,
Par value $100 per share, authorized 600,000 shares,
Outstanding -
4 1/2% Series, 138,576 shares . . . . . . . . . . . . . $ 13,858 $ 13,858
4 1/4% Series, 60,000 shares. . . . . . . . . . . . . . 6,000 6,000
5% Series, 50,000 shares. . . . . . . . . . . . . . . . 5,000 5,000
--------- ----------
24,858 24,858
--------- ----------
Preference stock subject to mandatory redemption,
Without par value, $100 stated value, authorized
4,000,000 shares, outstanding -
7.58% Series, 500,000 shares. . . . . . . . . . . . . . 50,000 50,000
--------- -----------
TOTAL CUMULATIVE PREFERRED AND PREFERENCE STOCK . . . . . . . . $ 74,858 $ 74,858
========= ===========
The Notes to Consolidated Financial Statements are an integral part of this
statement.
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
WESTERN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF COMMON SHAREOWNERS' EQUITY
(Dollars in Thousands, Except Per Share Amounts)
Unrealized
Gain on
Equity
Common Paid-in Retained Securities
Stock Capital Earnings (net)
<S> <C> <C> <C> <C>
BALANCE DECEMBER 31, 1994, 61,617,873 SHARES. . . . . $308,089 $667,992 $498,374 $ -
Net income. . . . . . . . . . . . . . . . . . . . . . 181,676
Cash dividends:
Preferred and preference stock. . . . . . . . . . . (13,419)
Common stock, $2.02 per share . . . . . . . . . . . (125,763)
Expenses on common stock. . . . . . . . . . . . . . . (772)
Issuance of 1,238,088 shares of common stock. . . . . 6,191 30,742
-------- --------
BALANCE DECEMBER 31, 1995, 62,855,961 SHARES. . . . . 314,280 697,962 540,868 -
Net income. . . . . . . . . . . . . . . . . . . . . . 168,950
Cash dividends:
Preferred and preference stock. . . . . . . . . . . (14,839)
Common stock, $2.06 per share . . . . . . . . . . . (131,611)
Issuance of 1,769,298 shares of common stock. . . . . 8,846 41,471 (1,247)
-------- -------- --------
BALANCE DECEMBER 31, 1996, 64,625,259 SHARES. . . . . 323,126 739,433 562,121 -
Net income. . . . . . . . . . . . . . . . . . . . . . 494,094
Cash dividends:
Preferred and preference stock. . . . . . . . . . . (4,919)
Common stock, $2.10 . . . . . . . . . . . . . . . . (136,809)
Expenses on common stock. . . . . . . . . . . . . . . (5)
Issuance of 784,344 shares of common stock. . . . . . 3,922 21,125
Net change in unrealized gain on equity securities
(net of tax effect of $13,129). . . . . . . . . . . 12,119
-------- -------- -------- ---------
BALANCE DECEMBER 31, 1997, 65,409,603 SHARES. . . . . $327,048 $760,553 $914,487 $ 12,119
-------- -------- -------- ---------
The Notes to Consolidated Financial Statements are an integral part of this
statement.
</TABLE>
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WESTERN RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business: Western Resources, Inc. (the company) is a
publicly traded holding company. The company's primary business activities are
providing electric generation, transmission and distribution services to
approximately 614,000 customers in Kansas; providing security alarm monitoring
services to approximately 950,000 customers located throughout the United
States, providing natural gas transmission and distribution services to
approximately 1.4 million customers in Oklahoma and Kansas through its
investment in ONEOK Inc. (ONEOK) and investing in international power projects.
Rate regulated electric service is provided by KPL, a division of the company
and KGE, a wholly-owned subsidiary. Security services are primarily provided by
Protection One, Inc. (Protection One), a publicly-traded, approximately
82.4%-owned subsidiary.
Principles of Consolidation: The company prepares its financial statements
in conformity with generally accepted accounting principles. The accompanying
consolidated financial statements include the accounts of Western Resources and
its wholly-owned and majority-owned subsidiaries. All material intercompany
accounts and transactions have been eliminated. Common stock investments that
are not majority-owned are accounted for using the equity method when the
company's investment allows it the ability to exert significant influence.
The company currently applies accounting standards for its rate regulated
electric business that recognize the economic effects of rate regulation in
accordance with Statement of Financial Accounting Standards No. 71, "Accounting
for the Effects of Certain Types of Regulation", (SFAS 71) and, accordingly, has
recorded regulatory assets and liabilities when required by a regulatory order
or when it is probable, based on regulatory precedent, that future rates will
allow for recovery of a regulatory asset.
The financial statements require management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, to
disclose contingent assets and liabilities at the balance sheet dates and to
report amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Cash and Cash Equivalents: The company considers highly liquid
collateralized debt instruments purchased with a maturity of three months or
less to be cash equivalents.
Available-for-sale Securities: The company classifies marketable equity
securities accounted for under the cost method as available-for-sale. These
securities are reported at fair value based on quoted market prices. Unrealized
gains and losses, net of the related tax effect, are reported as a separate
component of shareowners' equity until realized.
At December 31, 1997, an unrealized gain of $12 million (net of deferred
taxes of $13 million) was included in shareowners' equity. These securities had
a fair value of approximately $75 million and a cost of approximately $50
million at December 31, 1997. There were no available-for-sale securities held
at December 31, 1996.
Property, Plant and Equipment: Property, plant and equipment is stated at
cost. For utility plant, cost includes contracted services, direct labor and
materials, indirect charges for engineering, supervision, general and
administrative costs and an
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allowance for funds used during construction (AFUDC). The AFUDC rate was 5.80%
in 1997, 5.70% in 1996 and 6.31% in 1995. The cost of additions to utility plant
and replacement units of property are capitalized. Maintenance costs and
replacement of minor items of property are charged to expense as incurred. When
units of depreciable property are retired, they are removed from the plant
accounts and the original cost plus removal charges less salvage value are
charged to accumulated depreciation.
In accordance with regulatory decisions made by the KCC, the acquisition
premium of approximately $801 million resulting from the acquisition of KGE in
1992 is being amortized over 40 years. The acquisition premium is classified as
electric plant in service. Accumulated amortization through December 31, 1997
totaled $47.9 million.
Depreciation: Utility plant is depreciated on the straight-line method at
rates approved by regulatory authorities. Utility plant is depreciated on an
average annual composite basis using group rates that approximated 2.89% during
1997, 2.97% during 1996 and 2.84% during 1995. Nonutility property, plant and
equipment of approximately $20 million is depreciated on a straight-line basis
over the estimated useful lives of the related assets.
Fuel Costs: The cost of nuclear fuel in process of refinement, conversion,
enrichment and fabrication is recorded as an asset at original cost and is
amortized to expense based upon the quantity of heat produced for the generation
of electricity. The accumulated amortization of nuclear fuel in the reactor at
December 31, 1997 and 1996, was $20.9 million and $25.3 million, respectively.
Subscriber Accounts: The direct costs incurred to install a security
system for a customer are capitalized. These costs include the costs of accounts
purchased, the estimated fair value at the date of the acquisition for accounts
acquired in business combinations, equipment, direct labor and other direct
costs for internally generated accounts. These costs are amortized on a
straight-line basis over the average expected life of a subscriber account,
currently ten years. It is the company's policy to periodically evaluate
subscriber account attrition utilizing historical attrition experience.
Goodwill: Goodwill, which represents the excess of the purchase price over
the fair value of net assets acquired, is generally amortized on a straight-line
basis over 40 years.
Regulatory Assets and Liabilities: Regulatory assets represent probable
future revenue associated with certain costs that will be recovered from
customers through the ratemaking process. The company has recorded these
regulatory assets in accordance with Statement of Financial Accounting Standards
No. 71, "Accounting for the Effects of Certain Types of Regulation." If the
company were required to terminate application of that statement for all of its
regulated operations, the company would have to record the amounts of all
regulatory assets and liabilities in its Consolidated Statements of Income at
that time. The company's earnings would be reduced by the total net amount in
the table below, net of applicable income taxes. Regulatory assets reflected in
the consolidated financial statements at December 31, 1997 are as follows:
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December 31, 1997 1996
--------------------------------------------------------------
(Dollars in Thousands)
Recoverable taxes. . . . . . . . . . . . $212,996 $217,257
Debt issuance costs. . . . . . . . . . . 75,336 78,532
Deferred employee benefit costs. . . . . 37,875 40,834
Deferred plant costs . . . . . . . . . . 30,979 31,272
Coal contract settlement costs . . . . . 16,032 21,037
Other regulatory assets. . . . . . . . . 7,203 8,794
Phase-in revenues. . . . . . . . . . . . - 26,317
Deferred cost of natural gas purchased . - 21,332
Service line replacement . . . . . . . . - 12,921
-------- --------
Total regulatory assets . . . . . . . . $380,421 $458,296
======== ========
Recoverable income taxes: Recoverable income taxes represent amounts due
from customers for accelerated tax benefits which have been flowed through
to customers and are expected to be recovered when the accelerated tax
benefits reverse.
Debt issuance costs: Debt reacquisition expenses are amortized over the
remaining term of the reacquired debt or, if refinanced, the term of the
new debt. Debt issuance costs are amortized over the term of the
associated debt.
Deferred employee benefit costs: Deferred employee benefit costs will be
recovered from income generated from the company's Affordable Housing Tax
Credit (AHTC) investment program.
Deferred plant costs: Disallowances related to the Wolf Creek nuclear
generating facility.
Coal contract settlement costs: The company deferred costs associated with
the termination of certain coal purchase contracts. These costs are being
amortized over periods ending in 2002 and 2013.
The company expects to recover all of the above regulatory assets in
rates. The regulatory assets noted above, with the exception of some coal
contract settlement costs and debt issuance costs, other than the refinancing of
the La Cygne 2 lease, are not included in rate base and, therefore, do not earn
a return. On November 30, 1997, deferred costs associated with the service line
replacement program and the deferred cost of natural gas purchased were
transferred to ONEOK. Phase-in revenues were fully amortized in 1997.
Minority Interests: Minority interests represent the minority
shareowner's proportionate share of the shareowners' equity and net income of
Protection One.
Sales: Energy sales are recognized as services are rendered and include
estimated amounts for energy delivered but unbilled at the end of each year.
Unbilled revenue of $37 million and $83 million is recorded as a component of
accounts receivable (net) on the Consolidated Balance Sheets at December 31,
1997 and 1996, respectively. Security sales are recognized when installation of
an alarm system occurs and when monitoring or other security-related services
are provided.
The company's allowance for doubtful accounts receivable totaled $8.4
million and $6.3 million at December 31, 1997 and 1996, respectively.
Income Taxes: Deferred tax assets and liabilities are recognized for
temporary differences in amounts recorded for financial reporting purposes and
their respective tax bases. Investment tax credits previously deferred are being
amortized to income over the life of the property which gave rise to the credits
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Affordable Housing Tax Credit Program (AHTC): The company has received
authorization from the KCC to invest up to $114 million in AHTC investments. At
December 31, 1997, the company had invested approximately $17 million to
purchase AHTC investments in limited partnerships. The company is committed to
investing approximately $55 million more in AHTC investments by January 1, 2000.
These investments are accounted for using the equity method. Based upon an order
received from the KCC, income generated from the AHTC investment, primarily tax
credits, will be used to offset costs associated with postretirement and
postemployment benefits offered to the company's employees. Tax credits are
recognized in the year generated.
Risk Management: To minimize the risk from market fluctuations in the
price of electricity, the company utilizes financial and commodity instruments
(derivatives) to reduce price risk. Gains or losses on derivatives associated
with firm commitments are generally recognized as adjustments to cost of sales
or revenues when the associated transactions affect earnings. Gains or losses on
derivatives associated with forecasted transactions are generally recognized
when such forecasted transactions affect earnings.
New Pronouncements: In 1997, the company adopted Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" (SFAS 128). Basic earnings
per share is calculated based upon the average weighted number of common shares
outstanding during the period. There were no significant amounts of dilutive
securities outstanding at December 31, 1997, 1996 and 1995.
Effective January 1, 1997, the company adopted the provisions of Statement
of Position (SOP) 96-1, "Environmental Remediation Liabilities". This statement
provides authoritative guidance for recognition, measurement, display and
disclosure of environmental remediation liabilities in financial statements.
Adoption of this statement did not have a material adverse effect upon the
company's overall financial position or results of operations.
Reclassifications: Certain amounts in prior years have been reclassified
to conform with classifications used in the current year presentation.
2. GAIN ON SALE OF EQUITY SECURITIES
During 1996, the company acquired 27% of the common shares of ADT Limited,
Inc. (ADT) and made an offer to acquire the remaining ADT common shares. ADT
rejected this offer and in July 1997, ADT merged with Tyco International Ltd.
(Tyco). ADT and Tyco completed their merger by exchanging ADT common stock for
Tyco common stock.
Following the ADT and Tyco merger, the company's equity investment in ADT
became an available-for-sale security. During the third quarter of 1997, the
company sold its Tyco common shares for approximately $1.5 billion. The company
recorded a pre-tax gain of $864 million on the sale and recorded tax expense of
approximately $345 million in connection with this gain.
3. SECURITY ALARM MONITORING BUSINESS PURCHASES
In 1997 the company acquired three monitored security alarm companies.
Each acquisition was accounted for as a purchase and, accordingly, the operating
results for each acquired company have been included in the company's
consolidated financial statements since the date of acquisition. Preliminary
purchase price allocations have been made based upon the fair value of the net
assets acquired. The company acquired
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Network Multi-Family Security Corporation (Network Multi-Family) in September,
1997 for approximately $171 million and acquired Centennial Holdings, Inc.
(Centennial) in November 1997 for approximately $94 million. The company also
acquired an approximate 82.4% equity interest in Protection One in November
1997.
Protection One is a publicly traded security company. The company paid
approximately $258 million in cash and contributed all of its existing security
business net assets, other than Network Multi-Family, in exchange for its
ownership interest in Protection One. Amounts contributed included funds used to
pay existing Protection One common shareowners, option holders and warrant
holders a dividend of $7.00 per common share. The company has an option to
purchase up to 2.8 million additional common shares of Protection One for $15.50
per share. The option period extends to a date not later than October 31, 1999.
The company assigned approximately $278 million of the total purchase price to
subscriber accounts and approximately $620 million to goodwill in connection
with these security acquisitions. The subscriber accounts are being amortized
over ten years and goodwill is being amortized over 40 years.
Consideration paid, assets acquired and liabilities assumed in connection
with these security acquisitions is summarized as follows:
(Dollars in Thousands)
Fair value of assets acquired,
net of cash acquired . . . . . $1,001,094
Cash paid, net of cash acquired
of $88,822 . . . . . . . . . . (438,717)
Total liabilities assumed. . $ 562,377
The following unaudited, pro forma information for the company's security
business segment has been prepared assuming the Centennial, Network Multi-Family
and Protection One acquisitions occurred at the beginning of each period.
1997 1996
(Dollars in Thousands,
except per share data)
Net Revenues. . . . . . . $284,411 $241,841
Net Loss. . . . . . . . . (47,290) (24,762)
Net Loss per Share. . . . ($0.73) ($0.39)
The pro forma financial information is not necessarily indicative of the
results of operations had the entities been combined for the entire period, nor
do they purport to be indicative of results which will be obtained in the
future.
In December 1997, Protection One recorded a special non-recurring charge
of approximately $40 million. Approximately $28 million of this charge reflects
the elimination of redundant facilities and activities and the write-off of
inventory and other assets which are no longer of continuing value to Protection
One. The remaining $12 million of this charge reflects the estimated costs to
transition all security alarm monitoring operations to the Protection One brand.
Protection One intends to complete these exit activities by the fourth quarter
of 1998.
In January 1998, Protection One announced that it will acquire the
monitored security alarm business of Multimedia Security Services, Inc.
(Multimedia Security) for approximately $220 million in cash. The acquisition is
expected to close in the first quarter of 1998. Multimedia Security has
approximately 140,000 subscribers concentrated primarily in California, Florida,
Kansas, Oklahoma and Texas.
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On February 4, 1998, Protection One exercised its option to acquire the
stock of Network Holdings, Inc., the parent company of Network Multi-Family,
from the company for approximately $180 million. The company expects Protection
One to borrow money from a revolving credit agreement provided by Westar
Capital, a subsidiary of Western Resources, to purchase Network Multi-Family.
4. STRATEGIC ALLIANCE WITH ONEOK INC.
In November 1997, the company completed its strategic alliance with ONEOK.
The company contributed substantially all of its regulated and non-regulated
natural gas business to ONEOK in exchange for a 45% ownership interest in ONEOK.
The company's ownership interest in ONEOK is comprised of approximately
3.1 million common shares and approximately 19.9 million convertible preferred
shares. If all the preferred shares were converted, the company would own
approximately 45% of ONEOK's common shares presently outstanding. The agreement
with ONEOK allows the company to appoint two members to ONEOK's board of
directors. The company will account for its common ownership in accordance with
the equity method of accounting. Subsequent to the formation of the strategic
alliance, the consolidated energy revenues, related cost of sales and operating
expenses for the company's natural gas business have been replaced by investment
earnings in ONEOK.
5. MERGER AGREEMENT WITH KANSAS CITY POWER & LIGHT COMPANY
On February 7, 1997, the company signed a merger agreement with KCPL by
which KCPL would be merged with and into the company in exchange for company
stock. In December 1997, representatives of the company's financial advisor
indicated that they believed it was unlikely that they would be in a position to
issue a fairness opinion required for the merger on the basis of the previously
announced terms.
On March 18, 1998, the company and KCPL announced a restructuring of their
February 7, 1997, merger agreement which will result in the formation of Westar
Energy, a new electric company. Under the terms of the merger agreement, the
electric utility operations of the company will be transferred to KGE, and KCPL
and KGE will be merged into NKC, Inc., a subsidiary of the company. NKC, Inc.
will be renamed Westar Energy. In addition, under the terms of the merger
agreement, KCPL shareowners will receive $23.50 of company common stock per KCPL
share, subject to a collar mechanism, and one share of Westar Energy common
stock per KCPL share. Upon consummation of the combination, the company will own
approximately 80.1% of the outstanding equity of Westar Energy and KCPL
shareowners will own approximately 19.9%. As part of the combination, Westar
Energy will assume all of the electric utility related assets and liabilities of
the company, KCPL and KGE.
Westar Energy will assume $2.7 billion in debt, consisting of $1.9 billion
of indebtedness for borrowed money of the company and KGE, and $800 million of
debt of KCPL. Long-term debt of Western Resources and KGE was $2.1 billion at
December 31, 1997. Under the terms of the merger agreement, it is intended that
the company will be released from its obligations with respect to the company's
debt to be assumed by Westar Energy.
Pursuant to the merger agreement, the company has agreed, among other
things, to call for redemption all outstanding shares of its 4 1/2% Series
Preferred Stock, par value $100 per share, 4 1/4% Series Preferred Stock, par
value $100 per share, and 5% Series Preferred Stock, par value $100 per share.
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Consummation of the merger is subject to customary conditions including
obtaining the approval of the company's and KCPL's shareowners and various
regulatory agencies. The company estimates the transaction to close by mid-1999,
subject to receipt of all necessary approvals.
KCPL is a public utility company engaged in the generation, transmission,
distribution, and sale of electricity to customers in western Missouri and
eastern Kansas. The company, KCPL and KGE have joint interests in certain
electric generating assets, including Wolf Creek.
On March 23, 1998 the company and KCPL filed a letter informing the FERC
that it had signed a revised merger agreement, dated March 18, 1998. The company
sent similar letters on March 24, 1998 to the KCC and the MPSC. We and KCPL will
submit appropriate modifications to our merger filings at FERC, the KCC and the
MPSC as soon as practicable.
The company reviewed the deferred costs and have determined that for
accounting purposes, $48 million of the deferred costs relating to the original
merger agreement should be expensed. These costs were expensed in the fourth
quarter of 1997. At December 31, 1997, The company had deferred approximately $5
million related to the KCPL transaction.
6. INVESTMENTS IN SUBSIDIARIES
The consolidated financial statements include the company's equity
investments in ONEOK, Guardian International (Guardian) and Onsite Energy
Corporation (Onsite). The company's equity investments, net of the amortization
of goodwill in these entities, at December 31, 1997 and equity in earnings in
1997, are as follows:
Ownership Equity
Percentage Investment in Earnings
(Dollars in Thousands)
ONEOK Inc. (1). . . . . . . 45% $596,206 $1,970
Guardian (2). . . . . . . . 41% 9,174 $25
Onsite (3). . . . . . . . . 30% 3,312 -
(1) Includes equity earnings on the company's common stock investment between
ONEOK and the company.
(2) The company acquired a common and convertible preferred stock interest in
Guardian, a Florida-based security alarm monitoring company, during October
1997, in exchange for cash.
(3) The company acquired a common and convertible preferred stock interest in
Onsite, a California energy services company, during October, 1997, in exchange
for cash and certain energy service assets of the company.
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Summarized combined financial information for the company's equity
investments is presented below.
December 31, 1997
(Dollars in Thousands)
Balance Sheet:
Current assets . . . . . . . $ 535,348
Non-current assets . . . . . 1,771,900
Current liabilities. . . . . 445,770
Non-current liabilities. . . 737,975
Equity . . . . . . . . . . . 1,123,503
Year ended
December 31, 1997
(Dollars in Thousands)
Income Statement:
Revenues . . . . . . . . . . $1,241,164
Operating expenses . . . . . 1,147,866
Net income . . . . . . . . . 57,248
Balance sheet and income statement information is presented as of and for
the most recent twelve-month period for which public information is available.
ONEOK's balance sheet and income statement information is presented as of and
for the twelve months ended November 30, 1997. Guardian and Onsite's balance
sheet and income statement information is presented as of and for the twelve
months ended September 30, 1997. The company cannot give any assurance as to the
accuracy of the public information so obtained.
During 1997, the company's equity investment in ADT was converted to an
available- for-sale security investment in Tyco. The company recognized equity
in earnings from the ADT investment of $24 million and $7 million in 1997 and
1996, respectively. At December 31, 1996, the company's 27% investment in ADT
was approximately $597 million.
7. COMMITMENTS AND CONTINGENCIES
As part of its ongoing operations and construction program, the company
has commitments under purchase orders and contracts which have an unexpended
balance of approximately $87.8 million at December 31, 1997.
International Power Project Commitments: The company has ownership
interests in international power generation projects under construction in
Colombia and the Republic of Turkey and in existing power generation facilities
in the People's Republic of China. In 1998, commitments are not expected to
exceed $53 million. Currently, equity commitments beyond 1998 approximate $88
million.
Manufactured Gas Sites: The company has been associated with 15 former
manufactured gas sites located in Kansas which may contain coal tar and other
potentially harmful materials. The company and the Kansas Department of Health
and Environment (KDHE) entered into a consent agreement governing all future
work at the 15 sites. The terms of the consent agreement will allow the company
to investigate these sites and set remediation priorities based upon the results
of the investigations and risk analysis. At December 31, 1997, the costs
incurred for preliminary site investigation and risk assessment have been
minimal. In accordance with the terms of the strategic alliance with ONEOK,
ownership of twelve of these sites and the responsibility for clean-up of
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these sites were transferred to ONEOK. The ONEOK agreement limits our future
liability to an immaterial amount. Our share of ONEOK income could be impacted
by these costs.
Clean Air Act: The company must comply with the provisions of The Clean
Air Act Amendments of 1990 that require a two-phase reduction in certain
emissions. The company has installed continuous monitoring and reporting
equipment to meet the acid rain requirements. The company does not expect
material capital expenditures to be required to meet Phase II sulfur dioxide and
nitrogen oxide requirements.
Decommissioning: The company accrues decommissioning costs over the
expected life of the Wolf Creek generating facility. The accrual is based on
estimated unrecovered decommissioning costs which consider inflation over the
remaining estimated life of the generating facility and are net of expected
earnings on amounts recovered from customers and deposited in an external trust
fund.
In February 1997, the KCC approved the 1996 Decommissioning Cost Study.
Based on the study, the company's share of Wolf Creek's decommissioning costs,
under the immediate dismantlement method, is estimated to be approximately $624
million during the period 2025 through 2033, or approximately $192 million in
1996 dollars. These costs were calculated using an assumed inflation rate of
3.6% over the remaining service life from 1996 of 29 years.
Decommissioning costs are currently being charged to operating expenses in
accordance with the prior KCC orders. Electric rates charged to customers
provide for recovery of these decommissioning costs over the life of Wolf Creek.
Amounts expensed approximated $3.7 million in 1997 and will increase annually to
$5.6 million in 2024. These expenses are deposited in an external trust fund.
The average after tax expected return on trust assets is 5.7%.
The company's investment in the decommissioning fund, including reinvested
earnings approximated $43.5 million and $33.0 million at December 31, 1997 and
December 31, 1996, respectively. Trust fund earnings accumulate in the fund
balance and increase the recorded decommissioning liability.
The SEC staff has questioned the way electric utilities recognize, measure
and classify decommissioning costs for nuclear electric generating stations in
their financial statements. In response to the SEC's questions, the Financial
Accounting Standards Board is reviewing the accounting for closure and removal
costs, including decommissioning of nuclear power plants. If current accounting
practices for nuclear power plant decommissioning are changed, the following
could occur:
- The company's annual decommissioning expense could be higher
than in 1997
- The estimated cost for decommissioning could be recorded as a
liability (rather than as accumulated depreciation)
- The increased costs could be recorded as additional investment in
the Wolf Creek plant
The company does not believe that such changes, if required, would
adversely affect its operating results due to its current ability to recover
decommissioning costs through rates.
Nuclear Insurance: The company carries premature decommissioning insurance
which has several restrictions. One of these is that it can only be used if Wolf
Creek incurs an accident exceeding $500 million in expenses to safely stabilize
the reactor, to decontaminate the reactor and reactor station site in accordance
with a plan approved by the Nuclear Regulatory Commission (NRC) and to pay for
on-site property
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damages. This decommissioning insurance will only be available if the insurance
funds are not needed to implement the NRC-approved plan for stabilization and
decontamination.
The Price-Anderson Act limits the combined public liability of the owners
of nuclear power plants to $8.9 billion for a single nuclear incident. If this
liability limitation is insufficient, the U.S. Congress will consider taking
whatever action is necessary to compensate the public for valid claims. The Wolf
Creek owners (Owners) have purchased the maximum available private insurance of
$200 million. The remaining balance is provided by an assessment plan mandated
by the NRC. Under this plan, the Owners are jointly and severally subject to a
retrospective assessment of up to $79.3 million ($37.3 million, company's share)
in the event there is a major nuclear incident involving any of the nation's
licensed reactors. This assessment is subject to an inflation adjustment based
on the Consumer Price Index and applicable premium taxes. There is a limitation
of $10 million ($4.7 million, company's share) in retrospective assessments per
incident, per year.
The Owners carry decontamination liability, premature decommissioning
liability and property damage insurance for Wolf Creek totaling approximately
$2.8 billion ($1.3 billion, company's share). This insurance is provided by
Nuclear Electric Insurance Limited (NEIL). In the event of an accident,
insurance proceeds must first be used for reactor stabilization and site
decontamination. The company's share of any remaining proceeds can be used for
property damage or premature decommissioning costs. Premature decommissioning
coverage applies only if an accident at Wolf Creek exceeds $500 million in
property damage and decommissioning expenses and only after trust funds have
been exhausted.
The Owners also carry additional insurance with NEIL to cover costs of
replacement power and other extra expenses incurred during a prolonged outage
resulting from accidental property damage at Wolf Creek. If losses incurred at
any of the nuclear plants insured under the NEIL policies exceed premiums,
reserves and other NEIL resources, the company may be subject to retrospective
assessments under the current policies of approximately $9 million per year.
Although the company maintains various insurance policies to provide
coverage for potential losses and liabilities resulting from an accident or an
extended outage, the company's insurance coverage may not be adequate to cover
the costs that could result from a catastrophic accident or extended outage at
Wolf Creek. Any substantial losses not covered by insurance, to the extent not
recoverable through rates, would have a material adverse effect on the company's
financial condition and results of operations.
Fuel Commitments: To supply a portion of the fuel requirements for its
generating plants, the company has entered into various commitments to obtain
nuclear fuel and coal. Some of these contracts contain provisions for price
escalation and minimum purchase commitments. At December 31, 1997, Wolf Creek's
nuclear fuel commitments (company's share) were approximately $9.9 million for
uranium concentrates expiring at various times through 2001, $35.1 million for
enrichment expiring at various times through 2003 and $67.4 million for
fabrication through 2025.
At December 31, 1997, the company's coal contract commitments in 1997
dollars under the remaining terms of the contracts were approximately $2.4
billion. The largest coal contract expires in 2020, with the remaining coal
contracts expiring at various times through 2013.
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8. RATE MATTERS AND REGULATION
KCC Rate Proceedings: In January 1997, the KCC approved an agreement that
reduced electric rates for both KPL and KGE. Significant terms of the agreement
are as follows:
- The company made permanent an interim $8.7 million rate reduction
implemented by KGE in May 1996. This reduction was effective February 1,
1997.
- The company reduced KGE's annual rates by $36 million effective February
1, 1997.
- The company reduced KPL's annual rates by $10 million effective February
1, 1997.
- The company rebated $5 million to all of it electric customers in January
1998.
- The company will reduce KGE's annual rates by an additional $10 million on
June 1, 1998.
- The company will rebate an additional $5 million to all of its electric
customers in January 1999.
- The company will reduce KGE's annual rates by an additional $10 million on
June 1, 1999.
All rate decreases are cumulative. Rebates are one-time events and do not
influence future rates.
9. LEGAL PROCEEDINGS
On January 8, 1997, Innovative Business Systems, Ltd. (IBS) filed suit
against the company and Westinghouse Electric Corporation (WEC), Westinghouse
Security Systems, Inc. (WSS) and WestSec, Inc. (WestSec), a wholly-owned
subsidiary of the company established to acquire the assets of WSS, in Dallas
County, Texas district court (Cause No 97-00184) alleging, among other things,
breach of contract by WEC and interference with contract against the company in
connection with the sale by WEC of the assets of WSS to the company. IBS claims
that WEC improperly transferred software owned by IBS to the company and that
the company is not entitled to its use. The company has demanded WEC defend and
indemnify it. WEC and the company have denied IBS' allegations and are
vigorously defending against them. Management does not believe that the ultimate
disposition of this matter will have a material adverse effect upon the
company's overall financial condition or results of operations.
The company and its subsidiaries are involved in various other legal,
environmental and regulatory proceedings. Management believes that adequate
provision has been made and accordingly believes that the ultimate dispositions
of these matters will not have a material adverse effect upon the company's
overall financial position or results of operations.
10. EMPLOYEE BENEFIT PLANS
Pension: The company maintains qualified noncontributory defined benefit
pension plans covering substantially all utility employees. Pension benefits are
based on years of service and the employee's compensation during the five
highest paid consecutive years out of ten before retirement. The company's
policy is to fund pension costs accrued, subject to limitations set by the
Employee Retirement Income Security Act of 1974 and the Internal Revenue Code.
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Salary Continuation: The company maintains a non-qualified Executive
Salary Continuation Program for the benefit of certain management employees,
including executive officers.
The following tables provide information on the components of pension and
salary continuation costs funded status and actuarial assumptions for the
company:
Year Ended December 31, 1997 1996 1995
- ---------------------------------------------------------------------
(Dollars in Thousands)
SFAS 87 Expense:
Service cost. . . . . . . . . . $ 11,337 $ 11,644 $ 11,059
Interest cost on projected
benefit obligation. . . . . . 35,836 34,003 32,416
(Gain) loss on plan assets. . . (113,287) (65,799) (102,731)
Deferred investment gain (loss) 73,731 30,119 70,810
Net amortization. . . . . . . . 1,084 2,140 1,132
Other . . . . . . . . . . . . . 519 - -
-------- -------- -----
Net expense . . . . . . . . $ 9,220 $ 12,107 $ 12,686
======== ======== ========
December 31, 1997 1996 1995
- ---------------------------------------------------------------------
(Dollars in Thousands)
Reconciliation of Funded Status:
Actuarial present value of
benefit obligations:
Vested . . . . . . . . . . . $365,809 $347,734 $331,027
Non-vested . . . . . . . . . 21,024 23,220 21,775
-------- -------- --------
Total. . . . . . . . . . . $386,833 $370,954 $352,802
======== ======== ========
Plan assets (principally debt
and equity securities) at
fair value . . . . . . . . . . . $584,792 $495,993 $444,608
Projected benefit obligation . . . 462,964 483,862 456,707
-------- -------- --------
Funded status. . . . . . . . . . . 121,828 12,131 (12,099)
Unrecognized transition asset. . . (369) (448) (527)
Unrecognized prior service costs . 39,763 62,434 57,087
Unrecognized net (gain). . . . . . (193,313) (103,132) (75,312)
-------- -------- --------
Accrued liability. . . . . . . . $(32,091) $(29,015) $(30,851)
======== ======== ========
Year Ended December 31, 1997 1996 1995
- ----------------------------------------------------------------------
Actuarial Assumptions:
Discount rate. . . . . . . . . . 7.5% 7.5% 7.5%
Annual salary increase rate. . . 3.5-4.75% 4.75% 4.75%
Long-term rate of return . . . . 9.0-9.25% 8.5-9.0% 8.5-9.0%
Postretirement and Postemployment Benefits: The company accrues the cost
of postretirement benefits, primarily medical benefit costs, during the years an
employee provides service. The company accrues postemployment benefits when the
liability has been incurred.
Based on actuarial projections and adoption of the transition method of
implementation which allows a 20-year amortization of the accumulated benefit
obligation, postretirement benefits expense approximated $16.6 million, $16.4
million and $15.0 million for 1997, 1996 and 1995, respectively. The company's
total postretirement benefit obligation approximated $83.7 million and $123.0
million at December 31, 1997 and 1996, respectively. The following table
summarizes the status of the company's postretirement benefit plans for
financial statement purposes and the related amounts included in the
Consolidated Balance Sheets:
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December 31, 1997 1996 1995
- ----------------------------------------------------------------------------
(Dollars in Thousands)
Reconciliation of Funded Status:
Actuarial present value of postretirement
benefit obligations:
Retirees. . . . . . . . . . . . . . $ 53,910 $ 76,588 $ 81,402
Active employees fully eligible . . 6,814 10,060 7,645
Active employees not fully eligible 22,949 36,345 34,144
-------- -------- --------
Total . . . . . . . . . . . . . . 83,673 122,993 123,191
Fair value of plan assets . . . . . . . 118 78 46
-------- -------- --------
Funded status . . . . . . . . . . . . . (83,555) (122,915) (123,145)
Unrecognized prior service cost . . . . (4,592) (8,157) (8,900)
Unrecognized transition obligation. . . 60,146 104,920 111,443
Unrecognized net (gain) . . . . . . . . (828) (8,137) (7,271)
-------- -------- --------
Accrued postretirement benefit costs $(28,829) $(34,289) $(27,873)
======== ======== ========
Year Ended December 31, 1997 1996 1995
- ----------------------------------------------------------------------------
Actuarial Assumptions:
Discount rate . . . . . . . . . . . . 7.5% 7.5% 7.5%
Annual salary increase rate . . . . . 4.75% 4.75% 4.75%
Expected rate of return . . . . . . . 9.0% 9.0% 9.0%
For measurement purposes, an annual health care cost growth rate of 9% was
assumed for 1997, decreasing one percent per year to five percent in 2001 and
thereafter. The health care cost trend rate has a significant effect on the
projected benefit obligation. Increasing the trend rate by one percent each year
would increase the present value of the accumulated projected benefit obligation
by $3.5 million and the aggregate of the service and interest cost components by
$0.3 million.
In accordance with an order from the KCC, the company has deferred
postretirement and postemployment expenses in excess of actual costs paid. In
1997 the company received authorization from the KCC to invest in AHTC
investments. Income from the AHTC investments will be used to offset the
deferred and incremental costs associated with postretirement and postemployment
benefits offered to the company's employees. The income generated from the AHTC
investments replaces the income stream from COLI contracts purchased in 1992 and
1993 which was used for the same purpose.
Savings: The company maintains savings plans in which substantially all
employees participate. The company matches employees' contributions up to
specified maximum limits. The funds of the plans are deposited with a trustee
and invested at each employee's option in one or more investment funds,
including a company stock fund. The company's contributions were $5.0 million,
$4.6 million and $5.1 million for 1997, 1996 and 1995, respectively.
Protection One also maintains a savings plan. Contributions, made at
Protection One's election, are allocated among participants based upon the
respective contributions made by the participants through salary reductions
during the year. Protection One's matching contributions may be made in
Protection One common stock, in cash or in a combination of both stock and cash.
Protection One's matching contribution to the plan for 1997 was $34,000.
Protection One maintains a qualified employee stock purchase plan that
allows eligible employees to acquire shares of Protection One common shares at
85% of fair market value of the common stock. A total of 650,000 shares of
common stock have been reserved for issuance in this program.
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Stock Based Compensation Plans: The company has two stock-based
compensation plans, a long-term incentive and share award plan (LTISA Plan) and
a long-term incentive program (LTI Program). The company accounts for these
plans under Accounting Principles Board Opinion No. 25 and the related
Interpretations. Had compensation cost been determined pursuant to Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123), the company would have recognized additional
compensation costs during 1997, 1996 and 1995. However, recognition of the
compensation costs would not have been material to the Consolidated Statements
of Income nor would these costs have affected basic earnings per share.
The LTISA Plan was implemented to help ensure that managers and board
members (Plan Participants) were properly incented to increase shareowner value.
It was established to replace the company's LTI Program, discussed below. Under
the LTISA Plan, the company may grant awards in the form of stock options,
dividend equivalents, share appreciation rights, restricted shares, restricted
share units, performance shares and performance share units to Plan
Participants. Up to three million shares of common stock may be granted under
the LTISA Plan.
The LTISA Plan granted 459,700 and 205,700 stock options and 459,700 and
205,700 dividend equivalents to Plan Participants during 1997 and 1996,
respectively. The exercise price of the stock options granted was $30.75 and
$29.25 in 1997 and 1996, respectively. These options vest in nine years.
Accelerated vesting allows stock options to vest within three years, dependent
upon certain company performance factors. The options expire in approximately
ten years. The weighted-average grant-date fair value of the dividend equivalent
was $6.21 and $5.82 in 1997 and 1996, respectively. The value of each dividend
equivalent is calculated as a percentage of the accumulated dividends that would
have been paid or payable on a share of company common stock. This percentage
ranges from zero to 100%, based upon certain company performance factors. The
dividend equivalents expire after nine years from the date of grant. All stock
options and dividend equivalents granted were outstanding at December 31, 1997.
The fair value of stock options and dividend equivalents were estimated on
the date of grant using the Black-Scholes option-pricing model. The model
assumed a dividend yield of 6.58% and 6.33%, expected volatility of 13.56% and
14.12%; and an expected life of 9.0 and 8.7 years for 1997 and 1996,
respectively. Additionally, the stock option model assumed a risk-free interest
rate of 6.72% and 6.45% for 1997 and 1996, respectively. The dividend equivalent
model assumed a risk-free interest rate of 6.36% and 6.61% for 1997 and 1996,
respectively, an award percentage of 100% and a dividend accumulation period of
five years.
The LTI Program is a performance-based stock plan which awards performance
shares to executive officers (Program Participants) of the company equal in
value to 10% of the officer's annual base compensation. Each performance share
is equal in value to one share of the company's common stock. Each Program
Participant may be entitled to receive a common stock distribution based on the
value of performance shares awarded multiplied by a distribution percentage not
to exceed 110%. This distribution percentage is based upon the Program
Participants' and the company's performance. Program Participants also receive
cash equivalent to dividends on common stock for performance shares awarded.
In 1995, the company granted 14,756 performance shares, with a
weighted-average fair value of $28.81. The fair value of each performance share
is based on market price at the date of grant. No performance shares were
granted in 1997 or 1996. At December 31, 1997, shares granted in 1995 no longer
have a remaining contractual life and will be paid in March 1998.
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<PAGE>
11. PROTECTION ONE STOCK WARRANTS AND OPTIONS
Protection One has outstanding stock warrants and options which were
considered reissued and exercisable upon the company's acquisition of Protection
One on November 24, 1997. In lieu of adjusting the number of outstanding options
and warrants, holders of options or warrants received a $7 per share equivalent
cash payment in the acquisition. Stock option activity subsequent to the
acquisition was as follows:
Warrants
and Options Price Range
Balance at November 24, 1997. . . . . . 2,198,389 $0.05-$16.375
Granted . . . . . . . . . . . . . . . . - -
Exercised . . . . . . . . . . . . . . . (306) $ 0.05
Surrendered . . . . . . . . . . . . . . - -
Balance at December 31, 1997. . . . . . 2,198,083 $0.05-$16.375
Stock options and warrants outstanding at December 31, 1997 are as
follows:
Number Weighted Weighted
Range of Outstanding Average Average
Exercise and Remaining Life Exercise
Price Exercisable (Years) Price
$ 5.875-$ 9.125 159,360 8 $ 6.602
$ 8.000-$10.313 384,300 8 $ 8.088
$12.125-$16.375 148,000 8 $14.857
$ 9.50 253,000 9 $ 9.50
$15.00 50,000 9 $15.00
$14.268 50,000 4 $14.268
$ 0.05 1,425 9 $ 0.05
$ 3.633 103,697 4 $ 3.633
$ 0.167 462,001 6 $ 0.167
$ 6.60 466,400 8 $ 6.60
The company holds a call option for an additional 2,750,238 shares of
Protection One, exercisable at a price of $15.50. The option expires no later
than October 31, 1999.
Certain options outstanding have been issued as incentive awards to
directors, officers, and key employees in accordance with Protection One's 1994
Stock Option Plan. Had the fair value based method been used to determine
compensation expense for these stock options, recognition of the compensation
costs would not have been material.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value as set forth in Statement of Financial Accounting Standards No. 107
"Disclosures about Fair Value of Financial Instruments".
Cash and cash equivalents, short-term borrowings and variable-rate debt
are carried at cost which approximates fair value. The decommissioning trust is
recorded at fair value and is based on the quoted market prices at December 31,
1997 and 1996. The fair value of fixed-rate debt, redeemable preference stock
and other mandatorily redeemable securities is estimated based on quoted market
prices for the same or similar issues or on the current rates offered for
instruments of the same remaining maturities and
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<PAGE>
redemption provisions. The estimated fair values of contracts related to
commodities have been determined using quoted market prices of the same or
similar securities.
The recorded amount of accounts receivable and other current financial
instruments approximate fair value.
The fair value estimates presented herein are based on information
available at December 31, 1997 and 1996. These fair value estimates have not
been comprehensively revalued for the purpose of these financial statements
since that date and current estimates of fair value may differ significantly
from the amounts presented herein. Because a substantial portion of the
company's operations are regulated, the company believes that any gains or
losses related to the retirement of debt or redemption of preferred securities
would not have a material effect on the company's financial position or results
of operations.
The carrying values and estimated fair values of the company's financial
instruments are as follows:
Carrying Value Fair Value
December 31, 1997 1996 1997 1996
-----------------------------------------------------------------------
(Dollars in Thousands)
Decommissioning trust. . $ 43,514 $ 33,041 $ 43,514 $ 33,041
Fixed-rate debt. . . . . 2,019,103 1,224,743 2,101,167 1,260,722
Redeemable preference
stock. . . . . . . . . 50,000 50,000 51,750 52,500
Other mandatorily
redeemable securities. 220,000 220,000 226,088 214,800
The company is involved in both the marketing of electricity and risk
management services to wholesale electric customers and the purchase of
electricity for the company's retail customers. In addition to the purchase and
sale of electricity, the company engages in price risk management activities,
including the use of forward contracts, futures, swap agreements and put and
call options. The availability and use of these types of contracts allow the
company to manage and hedge its contractual commitments, reduce its exposure
relative to the volatility of cash market prices and take advantage of selected
arbitrage opportunities via open positions. Such open positions during 1997 were
not material to the company's financial position or results of operations.
In general, the company does not seek to take significant commodity risk
for the purpose of generating margins in the ordinary course of its trading
activities. The company has established a risk management policy designed to
limit the company's exposure to price risk, and it continually monitors and
reviews this policy to ensure that it is responsive to changing business
conditions. This policy requires that, in general, positions taken with
derivatives be offset by positions in physical transactions or other
derivatives. Due to the illiquid nature of the emerging electric markets, net
open positions in terms of price, volume and specified delivery point can occur.
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<PAGE>
December 31, 1997 1996
- ----------------------------------------------------------------
(Dollars in Thousands)
Notional Notional
Volumes Estimated Gain/ Volumes Estimated Gain/
(MWH's) Fair Value (loss) (mmbtu's) Fair Value (loss)
Forward
contracts 359,200 $9,086 $202 - - -
Options 924,000 $1,790 ($329) - - -
Natural gas
futures - $ - $ - 6,540,000 $16,032 $2,061
Natural gas
swaps - $ - $ - 2,344,000 $ 5,500 $1,315
In November 1997, the company contributed its natural gas marketing
business to ONEOK. As a result, the company did not have any natural gas futures
or natural gas swaps as of December 31, 1997.
13. COMMON STOCK, PREFERRED STOCK, PREFERENCE STOCK,
AND OTHER MANDATORILY REDEEMABLE SECURITIES
The company's Restated Articles of Incorporation, as amended, provide for
85,000,000 authorized shares of common stock. At December 31, 1997, 65,409,603
shares were outstanding.
The company has a Direct Stock Purchase Plan (DRIP). Shares issued under
the DRIP may be either original issue shares or shares purchased on the open
market. The company has issued original issue shares under DRIP from January 1,
1995 until October 15, 1997. On November 1, 1997, DRIP began issuing shares
purchased on the open market. During 1997, a total of 837,549 shares were issued
under DRIP including 784,344 original issue shares and 53,205 shares purchased
on the open market. At December 31, 1997, 1,244,617 shares were available under
the DRIP registration statement.
Preferred Stock Not Subject to Mandatory Redemption: The cumulative
preferred stock is redeemable in whole or in part on 30 to 60 days notice at the
option of the company.
Preference Stock Subject to Mandatory Redemption: The mandatory sinking
fund provisions of the 7.58% Series preference stock require the company to
redeem 25,000 shares annually beginning on April 1, 2002 and each April 1
through 2006 and the remaining shares on April 1, 2007, all at $100 per share.
The company may, at its option, redeem up to an additional 25,000 shares on each
April 1 at $100 per share. The 7.58% Series also is redeemable in whole or in
part, at the option of the company, subject to certain restrictions on
refunding, at a redemption price of $103.79, $103.03 and $102.27 per share
beginning April 1, 1997, 1998 and 1999, respectively.
Other Mandatorily Redeemable Securities: On December 14, 1995, Western
Resources Capital I, a wholly-owned trust, issued four million preferred
securities of 7-7/8% Cumulative Quarterly Income Preferred Securities, Series A,
for $100 million. The trust interests represented by the preferred securities
are redeemable at the option of Western Resources Capital I, on or after
December 11, 2000, at $25 per preferred security plus accrued interest and
unpaid dividends. Holders of the securities are entitled to receive
distributions at an annual rate of 7-7/8% of the liquidation preference value of
$25. Distributions are payable quarterly and in substance are tax deductible by
the company. These distributions are recorded as interest expense. The sole
asset of the trust is $103 million principal amount of 7-7/8% Deferrable
Interest Subordinated Debentures, Series A due December 11, 2025 (the
Subordinated Debentures).
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On July 31, 1996, Western Resources Capital II, a wholly-owned trust, of
which the sole asset is subordinated debentures of the company, sold in a public
offering, 4.8 million shares of 8-1/2% Cumulative Quarterly Income Preferred
Securities, Series B, for $120 million. The trust interests represented by the
preferred securities are redeemable at the option of Western Resources Capital
II, on or after July 31, 2001, at $25 per preferred security plus accumulated
and unpaid distributions. Holders of the securities are entitled to receive
distributions at an annual rate of 8-1/2% of the liquidation preference value of
$25. Distributions are payable quarterly and in substance are tax deductible by
the company. These distributions are recorded as interest expense. The sole
asset of the trust is $124 million principal amount of 8-1/2% Deferrable
Interest Subordinated Debentures, Series B due July 31, 2036.
In addition to the company's obligations under the Subordinated
Debentures, the company has agreed to guarantee, on a subordinated basis,
payment of distributions on the preferred securities. These undertakings
constitute a full and unconditional guarantee by the company of the trust's
obligations under the preferred securities.
14. LEASES
At December 31, 1997, the company had leases covering various property and
equipment. The company currently has no significant capital leases.
Rental payments for operating leases and estimated rental commitments are
as follows:
Operating
Year Ended December 31, Leases
(Dollars in Thousands)
1995 . . . . . . . . . . . . . . $ 63,353
1996 . . . . . . . . . . . . . . 63,181
1997 . . . . . . . . . . . . . . 71,126
Future Commitments:
1998 . . . . . . . . . . . . . . 66,998
1999 . . . . . . . . . . . . . . 59,634
2000 . . . . . . . . . . . . . . 53,456
2001 . . . . . . . . . . . . . . 50,303
2002 . . . . . . . . . . . . . . 49,999
Thereafter . . . . . . . . . . . 655,558
--------
Total. . . . . . . . . . . . . . $935,948
========
In 1987, KGE sold and leased back its 50% undivided interest in the La
Cygne 2 generating unit. The La Cygne 2 lease has an initial term of 29 years,
with various options to renew the lease or repurchase the 50% undivided
interest. KGE remains responsible for its share of operation and maintenance
costs and other related operating costs of La Cygne 2. The lease is an operating
lease for financial reporting purposes. The company recognized a gain on the
sale which was deferred and is being amortized over the initial lease term.
In 1992, the company deferred costs associated with the refinancing of the
secured facility bonds of the Trustee and owner of La Cygne 2. These costs are
being amortized over the life of the lease and are included in operating
expense. Approximately $21.4 million of this deferral remained on the
Consolidated Balance Sheet at December 31, 1997.
Future minimum annual lease payments, included in the table above,
required under the La Cygne 2 lease agreement are approximately $34.6 million
for each year through
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2002 and $576.6 million over the remainder of the lease. KGE's lease expense,
net of amortization of the deferred gain and refinancing costs, was
approximately $27.3 million for 1997 and $22.5 million for 1996 and 1995.
15. LONG-TERM DEBT
The amount of the company's first mortgage bonds authorized by its
Mortgage and Deed of Trust, dated July 1, 1939, as supplemented, is unlimited.
The amount of KGE's first mortgage bonds authorized by the KGE Mortgage and Deed
of Trust, dated April 1, 1940, as supplemented, is limited to a maximum of $2
billion. Amounts of additional bonds which may be issued are subject to
property, earnings and certain restrictive provisions of each mortgage.
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Debt discount and expenses are being amortized over the remaining lives of
each issue. During the years 1998 through 2002, $21 million of other long-term
debt will mature in 1998, $125 million of bonds and $42 million of other
long-term debt will mature in 1999, $75 million of bonds will mature in 2000 and
$100 million of bonds will mature in 2002. No other bonds will mature during
this time period.
Long-term debt outstanding is as follows at December 31:
1997 1996
---------- -------
(Dollars in Thousands)
Western Resources First mortgage bond series:
7 1/4% due 1999. . . . . . . . . . . . . $ 125,000 $ 125,000
8 7/8% due 2000. . . . . . . . . . . . . 75,000 75,000
7 1/4% due 2002. . . . . . . . . . . . . 100,000 100,000
8 1/2% due 2022. . . . . . . . . . . . . 125,000 125,000
7.65% due 2023. . . . . . . . . . . . . 100,000 100,000
---------- ----------
525,000 525,000
Pollution control bond series:
Variable due 2032 (1). . . . . . . . . . 45,000 45,000
Variable due 2032 (2). . . . . . . . . . 30,500 30,500
6% due 2033. . . . . . . . . . . . . 58,420 58,420
---------- ----------
133,920 133,920
KGE
First mortgage bond series:
7.60 % due 2003. . . . . . . . . . . . . 135,000 135,000
6 1/2% due 2005. . . . . . . . . . . . . 65,000 65,000
6.20 % due 2006. . . . . . . . . . . . . 100,000 100,000
---------- ----------
300,000 300,000
Pollution control bond series:
5.10 % due 2023. . . . . . . . . . . . . 13,757 13,822
Variable due 2027 (3). . . . . . . . . . 21,940 21,940
7.0 % due 2031. . . . . . . . . . . . . 327,500 327,500
Variable due 2032 (4). . . . . . . . . . 14,500 14,500
Variable due 2032 (5). . . . . . . . . . 10,000 10,000
---------- ----------
387,697 387,762
Revolving credit agreement . . . . . . . . . - 275,000
Western Resources 6 7/8% unsecured
senior notes due 2004. . . . . . . . . . . 370,000 -
Western Resources 7 1/8% unsecured
senior notes due 2009 . . . . . . . . . . 150,000 -
Protection One 6.4% senior subordinated
discount notes due 2005. . . . . . . . . 171,926 -
Protection One 6.75% convertible senior
subordinated discount notes due 2003. . . 102,500 -
Other long-term agreements . . . . . . . . . 67,748 65,190
Less:
Unamortized debt discount. . . . . . . . 5,719 5,289
Long-term debt due within one year . . . 21,217 -
---------- ----------
Long-term debt (net). . . . . . . . . . . . $2,181,855 $1,681,583
========== ==========
Rates at December 31, 1997: (1) 4.00%, (2) 4.05%, (3) 3.95%,
(4) 3.85% and (5) 3.89%
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Protection One maintains a $100 million revolving credit facility that
expires in January 2000. Under the terms of this agreement, Protection One may,
at its option, borrow at different market-based interest rates. At December 31,
1997, there were no borrowings under this facility.
16. SHORT-TERM DEBT
The company has arrangements with certain banks to provide unsecured
short-term lines of credit on a committed basis totaling approximately $773
million. The agreements provide the company with the ability to borrow at
different market-based interest rates. The company pays commitment or facility
fees in support of these lines of credit. Under the terms of the agreements, the
company is required, among other restrictions, to maintain a total debt to total
capitalization ratio of not greater than 65% at all times. The unused portion of
these lines of credit are used to provide support for commercial paper.
In addition, the company has agreements with several banks to borrow on an
uncommitted, as available, basis at money-market rates quoted by the banks.
There are no costs, other than interest, for these agreements. The company also
uses commercial paper to fund its short-term borrowing requirements.
Information regarding the company's short-term borrowings, comprised of
borrowings under the credit agreements, bank loans and commercial paper, is as
follows:
December 31, 1997 1996 1995
- -----------------------------------------------------------------------
(Dollars in Thousands)
Borrowings outstanding at year end:
Lines of credit $ - $525,000 $ -
Bank loans 161,000 162,300 177,600
Commercial paper notes 75,500 293,440 25,850
-------- -------- --------
Total $236,500 $980,740 $203,450
======== ======== ========
Weighted average interest rate on
debt outstanding at year end
(including fees) 6.28% 5.94% 6.02%
Weighted average short-term debt
outstanding during the year $787,507 $491,136 $301,871
Weighted daily average interest
rates during the year
(including fees) 5.93% 5.72% 6.15%
Unused lines of credit supporting
commercial paper notes $772,850 $447,850 $121,075
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17. INCOME TAXES
Income tax expense is composed of the following components at December 31:
1997 1996 1995
-------- -------- ------
(Dollars in Thousands)
Currently payable:
Federal. . . . . . . . . $336,150 $54,644 $50,674
State. . . . . . . . . . 72,143 20,280 17,003
Deferred:
Federal. . . . . . . . . (19,766) 14,808 22,911
State. . . . . . . . . . (3,217) (615) 601
Amortization of investment
tax credits . . . . . . . (6,665) (6,758) (6,809)
-------- ------- -------
Total income tax expense . $378,645 $82,359 $84,380
======== ======= =======
Under SFAS 109, temporary differences gave rise to deferred tax assets and
deferred tax liabilities as follows at December 31:
1997 1996
---------- -------
(Dollars in Thousands)
Deferred tax assets:
Deferred gain on sale-leaseback. . . . . $ 97,634 $ 99,466
Security business deferred tax assets. . 103,054 -
Other. . . . . . . . . . . . . . . . . . 94,008 30,195
---------- ----------
Total deferred tax assets. . . . . . . $ 294,696 $ 129,661
========== ==========
Deferred tax liabilities:
Accelerated depreciation and other . . . $ 625,176 $ 654,102
Acquisition premium. . . . . . . . . . . 299,162 307,242
Deferred future income taxes . . . . . . 213,658 217,257
Other. . . . . . . . . . . . . . . . . . 112,555 61,432
---------- ----------
Total deferred tax liabilities . . . . $1,250,551 $1,240,033
========== ==========
Investment tax credits . . . . . . . . . . $ 109,710 $ 125,528
========== ==========
Accumulated deferred income taxes, net . . $1,065,565 $1,235,900
========== ==========
In accordance with various rate orders, the company has not yet collected
through rates certain accelerated tax deductions which have been passed on to
customers. As management believes it is probable that the net future increases
in income taxes payable will be recovered from customers, it has recorded a
deferred asset for these amounts. These assets also are a temporary difference
for which deferred income tax liabilities have been provided.
The effective income tax rates set forth below are computed by dividing
total federal and state income taxes by the sum of such taxes and net income.
The difference between the effective tax rates and the federal statutory income
tax rates are as follows:
70
<PAGE>
Year Ended December 31, 1997 1996 1995
- ---------------------------------------------------------------------------
Effective Income Tax Rate. . . . . . . . . 43.4% 32.8% 31.8%
Effect of:
State income taxes. . . . . . . . . . . . (5.0) (5.1) (4.3)
Amortization of investment tax credits. . 0.8 2.7 2.5
Corporate-owned life insurance policies . 0.9 3.7 3.2
Accelerated depreciation flow through
and amortization, net . . . . . . . . . (0.4) (.2) (.2)
Adjustment to tax provision . . . . . . . (3.7) - -
Other . . . . . . . . . . . . . . . . . . (1.0) 1.1 2.0
Statutory Federal Income Tax Rate. . . . . 35.0% 35.0% 35.0%
18. PROPERTY, PLANT AND EQUIPMENT
The following is a summary of property, plant and equipment at December
31:
1997 1996
---------- -------
(Dollars in Thousands)
Electric plant in service. . . . . . . $5,564,695 $5,448,489
Natural gas plant in service . . . . . - 834,330
---------- ----------
5,564,695 6,282,819
Less - accumulated depreciation. . . . 1,895,084 2,058,596
---------- ----------
3,669,611 4,224,223
Construction work in progress. . . . . 60,006 93,834
Nuclear fuel (net) . . . . . . . . . . 40,696 38,461
---------- ----------
Net utility plant. . . . . . . . . . 3,770,313 4,356,518
Non-utility plant in service . . . . . 20,237 41,965
Less - accumulated depreciation. . . . 4,022 14,466
---------- ----------
Net property, plant and equipment. . $3,786,528 $4,384,017
========== ==========
The carrying value of long-lived assets, including intangibles are
reviewed for impairment whenever events or changes in circumstances indicate
they may not be recoverable.
19. JOINT OWNERSHIP OF UTILITY PLANTS
Company's Ownership at December 31, 1997
In-Service Invest- Accumulated Net Per-
Dates ment Depreciation (MW) cent
(Dollars in Thousands)
La Cygne 1 (a) Jun 1973 $ 162,400 $109,481 343 50
Jeffrey 1 (b) Jul 1978 291,624 131,397 617 84
Jeffrey 2 (b) May 1980 290,468 121,854 617 84
Jeffrey 3 (b) May 1983 403,046 153,084 605 84
Wolf Creek (c) Sep 1985 1,380,660 399,551 547 47
(a) Jointly owned with KCPL (b) Jointly owned with UtiliCorp United Inc.
(c) Jointly owned with KCPL and Kansas Electric Power Cooperative, Inc.
Amounts and capacity presented above represent the company's share. The
company's share of operating expenses of the plants in service above, as well as
such expenses
71
<PAGE>
for a 50% undivided interest in La Cygne 2 (representing 334 MW capacity) sold
and leased back to the company in 1987, are included in operating expenses on
the Consolidated Statements of Income. The company's share of other transactions
associated with the plants is included in the appropriate classification in the
company's Consolidated Financial Statements.
20. SEGMENTS OF BUSINESS
The company is a diversified energy and security alarm monitoring service
company principally engaged in the generation, transmission, distribution and
sale of electricity in Kansas and a security alarm monitoring provider for
residential and multi-family units operating in 48 states in the U.S. through
Protection One.
Electric consists of the company's regulated electric utility business.
Natural gas includes the company's regulated and non-regulated natural gas
business. Security alarm monitoring includes the company's security alarm
monitoring business activities, including installation activities. Energy
related includes the company's international power development projects and
other domestic energy related services.
Year Ended December 31, 1997 1996 1995
- ----------------------------------------------------------------------
(Dollars in Thousands)
Sales:
Electric. . . . . . . . . . . $1,160,166 $1,197,441 $1,146,869
Natural gas(1). . . . . . . . 739,059 797,021 436,692
Security alarm monitoring . . 152,347 8,546 344
Energy related. . . . . . . . 100,193 43,819 160,369
---------- ---------- ----------
2,151,765 2,046,827 1,744,274
---------- ---------- ----------
Income from operations:
Electric. . . . . . . . . . . 207,026 347,097 360,321
Natural gas(1). . . . . . . . 27,840 43,111 8,457
Security alarm monitoring . . (48,442) (3,553) (787)
Energy related. . . . . . . . (43,499) 1,898 5,730
---------- ---------- ----------
$ 142,925 $ 388,553 $ 373,721
========== ========== ==========
Identifiable assets at
December 31:
Electric. . . . . . . . . . . $4,640,322 $4,735,335 $4,740,817
Natural gas(1). . . . . . . . - 724,302 623,198
Security alarm monitoring . . 1,504,738 488,849 5,615
Energy related. . . . . . . . 831,900 699,295 121,047
---------- ---------- ----------
$6,976,960 $6,647,781 $5,490,677
========== ========== ==========
Depreciation and amortization:
Electric. . . . . . . . . . . $ 183,339 $ 170,094 $ 150,997
Natural gas(1). . . . . . . . 29,941 28,011 25,075
Security alarm monitoring . . 41,179 944 45
Energy related. . . . . . . . 2,266 2,282 1,713
---------- ---------- ----------
$ 256,725 $ 201,331 $ 177,830
========== ========== ==========
Capital expenditures:
Electric. . . . . . . . . . . $ 159,760 $ 138,475 $ 179,090
Natural gas(1). . . . . . . . 47,151 57,128 62,901
Security alarm monitoring . . 45,163 - -
Energy related. . . . . . . . 47,845 - -
---------- ---------- -------
$ 299,919 $ 195,603 $ 241,991
========== ========== ==========
(1) On November 30, 1997 the company contributed substantially all of its
natural gas segment in exchange for an equity interest in ONEOK.
72
<PAGE>
21. QUARTERLY RESULTS (UNAUDITED)
The amounts in the table are unaudited but, in the opinion of management,
contain all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the results of such periods. The business
of the company is seasonal in nature and, in the opinion of management,
comparisons between the quarters of a year do not give a true indication of
overall trends and changes in operations.
First Second Third Fourth
(Dollars in Thousands, except Per Share Amounts)
1997
Sales . . . . . . . . . . . . . $626,198 $454,006 $559,996 $511,565
Income from operations(1) . . . 103,297 57,498 110,391 (128,261)
Net income(1),(2) . . . . . . . 41,033 24,335 508,372 (79,646)
Earnings applicable to
common stock. . . . . . . . . 39,803 23,106 507,142 (80,876)
Basic earnings per share. . . . $ 0.61 $ 0.36 $ 7.77 $ (1.23)
Dividends per share . . . . . . $ 0.525 $ 0.525 $ 0.525 $ 0.525
Average common shares
outstanding . . . . . . . . . 64,807 65,045 65,243 65,408
Common stock price:
High. . . . . . . . . . . . . $ 31.50 $ 32.75 $ 35.00 $ 43.438
Low . . . . . . . . . . . . . $ 30.00 $ 29.75 $ 32.25 $ 33.625
1996
Sales . . . . . . . . . . . . . $555,623 $436,123 $490,175 $564,906
Income from operations. . . . . 95,475 73,196 129,504 90,378
Net income. . . . . . . . . . . 44,789 28,746 62,949 32,466
Earnings applicable to
common stock. . . . . . . . . 41,434 25,392 56,049 31,236
Basic earnings per share. . . . $ 0.66 $ 0.40 $ 0.87 $ 0.48
Dividends per share . . . . . . $ 0.515 $ 0.515 $ 0.515 $ 0.515
Average common shares
outstanding . . . . . . . . . 63,164 63,466 64,161 64,523
Common stock price:
High. . . . . . . . . . . . . $ 34.875 $ 30.75 $ 30.75 $ 31.75
Low . . . . . . . . . . . . . $ 29.25 $ 28.00 $ 28.25 $ 28.625
(1) During the fourth quarter of 1997, the company expensed deferred costs of
approximately $48 million associated with the original KCPL merger agreement.
Protection One recorded a special charge to income of approximately $40 million.
(2) During the third quarter of 1997, the company recorded a pre-tax gain of
approximately $864 million upon selling its Tyco common stock.
73
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information relating to the company's Directors required by Item 10 is
set forth in the company's definitive proxy statement for its 1998 Annual
Meeting of Shareholders to be filed with the SEC. Such information is
incorporated herein by reference to the material appearing under the caption
Election of Directors in the proxy statement to be filed by the company with the
SEC. See EXECUTIVE OFFICERS OF THE COMPANY in the proxy statement for the
information relating to the company's Executive Officers as required by Item 10.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is set forth in the company's
definitive proxy statement for its 1998 Annual Meeting of Shareholders to be
filed with the SEC. Such information is incorporated herein by reference to the
material appearing under the captions Information Concerning the Board of
Directors, Executive Compensation, Compensation Plans, and Human Resources
Committee Report in the proxy statement to be filed by the company with the SEC.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is set forth in the company's
definitive proxy statement for its 1998 Annual Meeting of Shareholders to be
filed with the SEC. Such information is incorporated herein by reference to the
material appearing under the caption Beneficial Ownership of Voting Securities
in the proxy statement to be filed by the company with the SEC.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
74
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
The following financial statements are included herein.
FINANCIAL STATEMENTS
Report of Independent Public Accountants
Consolidated Balance Sheets, December 31, 1997 and 1996
Consolidated Statements of Income, for the years ended December 31, 1997,
1996 and 1995
Consolidated Statements of Cash Flows, for the years ended December 31, 1997,
1996 and 1995
Consolidated Statements of Cumulative Preferred and Preference Stock,
December 31, 1997 and 1996
Consolidated Statements of Common Shareowners' Equity, for the years ended
December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
SCHEDULES
Schedules omitted as not applicable or not required under the Rules of
regulation S-X: I, II, III, IV, and V
REPORTS ON FORM 8-K
Form 8-K filed November 24, 1997 - Press release regarding the closing of
the combination of the security businesses of the company and Protection One,
Inc.
Form 8-K filed January 5, 1998 - Press release regarding merger with
Kansas City Power and Light Company.
Form 8-K filed March 23, 1998 - Amended and Restated Agreement and Plan of
Merger between the company and KCPL, dated as of March 18, 1998.
75
<PAGE>
EXHIBIT INDEX
All exhibits marked "I" are incorporated herein by reference.
Description
3(a) -Amended and Restated Agreement and Plan of Merger between I
the company and KCPL, dated as of March 18, 1998.
(filed as Exhibit 99.2 to the March 23, 1998 Form 8-K)
3(b) -By-laws of the company. (filed as Exhibit 3 to the I
March 31, 1997 Form 10-Q)
3(c) -Agreement and Plan of Merger between the company and KCPL, I
dated as of February 7, 1997. (filed as Exhibit 99.2 to the
February 10, 1997 Form 8-K)
3(d) -Agreement between the company and ONEOK dated as of I
December 12, 1996. (filed as Exhibit 99.2 to the December 12,
1997 Form 8-K)
3(e) -Form of Shareholder Agreement between New ONEOK and the I
company. (filed as Exhibit 99.3 to the December 12, 1997
Form 8-K)
3(f) -Restated Articles of Incorporation of the company, as amended I
May 7, 1996. (filed as Exhibit 3(a) to June, 1996 Form 10-Q)
3(g) -Restated Articles of Incorporation of the company, as amended I
May 25, 1988. (filed as Exhibit 4 to Registration Statement
No. 33-23022)
3(h) -Certificate of Correction to Restated Articles of Incorporation. I
(filed as Exhibit 3(b) to the December 1991 Form 10-K)
3(i) -Amendment to the Restated Articles of Incorporation, as amended I
May 5, 1992. (filed as Exhibit 3(c) to the December 31, 1995
Form 10-K)
3(j) -Amendments to the Restated Articles of Incorporation of the I
Company (filed as Exhibit 3 to the June 1994 Form 10-Q)
3(k) -Certificate of Designation of Preference Stock, 8.50% Series, I
without par value. (filed as Exhibit 3(d) to the December
1993 Form 10-K)
3(l) -Certificate of Designation of Preference Stock, 7.58% Series, I
without par value. (filed as Exhibit 3(e) to the December
1993 Form 10-K)
4(a) -Deferrable Interest Subordinated Debentures dated November 29, I
1995, between the company and Wilmington Trust Delaware,
Trustee (filed as Exhibit 4(c) to Registration Statement
No. 33-63505)
4(b) -Mortgage and Deed of Trust dated July 1, 1939 between the Company I
and Harris Trust and Savings Bank, Trustee. (filed as
Exhibit 4(a) to Registration Statement No. 33-21739)
4(c) -First through Fifteenth Supplemental Indentures dated July 1, I
1939, April 1, 1949, July 20, 1949, October 1, 1949, December 1,
1949, October 4, 1951, December 1, 1951, May 1, 1952,
October 1, 1954, September 1, 1961, April 1, 1969,
September 1, 1970, February 1, 1975, May 1, 1976 and April 1,
1977, respectively. (filed as Exhibit 4(b) to Registration
Statement No. 33-21739)
4(d) -Sixteenth Supplemental Indenture dated June 1, 1977. (filed as I
Exhibit 2-D to Registration Statement No. 2-60207)
4(e) -Seventeenth Supplemental Indenture dated February 1, 1978. I
(filed as Exhibit 2-E to Registration Statement No. 2-61310)
4(f) -Eighteenth Supplemental Indenture dated January 1, 1979. (filed I
as Exhibit (b) (1)-9 to Registration Statement No. 2-64231)
4(g) -Nineteenth Supplemental Indenture dated May 1, 1980. (filed as I
76
<PAGE>
Exhibit 4(f) to Registration Statement No. 33-21739)
4(h) -Twentieth Supplemental Indenture dated November 1, 1981. (filed I
as Exhibit 4(g) to Registration Statement No. 33-21739)
4(i) -Twenty-First Supplemental Indenture dated April 1, 1982. (filed I
as Exhibit 4(h) to Registration Statement No. 33-21739)
4(j) -Twenty-Second Supplemental Indenture dated February 1, 1983. I
(filed as Exhibit 4(i) to Registration Statement No. 33-21739)
4(k) -Twenty-Third Supplemental Indenture dated July 2, 1986. I
(filed as Exhibit 4(j) to Registration Statement No. 33-12054)
4(l) -Twenty-Fourth Supplemental Indenture dated March 1, 1987. I
(filed as Exhibit 4(k) to Registration Statement No. 33-21739)
4(m) -Twenty-Fifth Supplemental Indenture dated October 15, 1988. I
(filed as Exhibit 4 to the September 1988 Form 10-Q)
4(n) -Twenty-Sixth Supplemental Indenture dated February 15, 1990. I
(filed as Exhibit 4(m) to the December 1989 Form 10-K)
4(o) -Twenty-Seventh Supplemental Indenture dated March 12, 1992. I
(filed as exhibit 4(n) to the December 1991 Form 10-K)
4(p) -Twenty-Eighth Supplemental Indenture dated July 1, 1992. I
(filed as exhibit 4(o) to the December 1992 Form 10-K)
4(q) -Twenty-Ninth Supplemental Indenture dated August 20, 1992. I
(filed as exhibit 4(p) to the December 1992 Form 10-K)
4(r) -Thirtieth Supplemental Indenture dated February 1, 1993. I
(filed as exhibit 4(q) to the December 1992 Form 10-K)
4(s) -Thirty-First Supplemental Indenture dated April 15, 1993. I
(filed as exhibit 4(r) to Registration Statement No. 33-50069)
4(t) -Thirty-Second Supplemental Indenture dated April 15, 1994,
(filed as Exhibit 4(s) to the December 31, 1994 Form 10-K)
Instruments defining the rights of holders of other long-term debt not
required to be filed as exhibits will be furnished to the Commission upon
request.
10(a) -Long-term Incentive and Share Award Plan (filed as Exhibit I
10(a) to the June 1996 Form 10-Q)
10(b) -Form of Employment Agreement with officers of the Company I
(filed as Exhibit 10(b) to the June 1996 Form 10-Q)
10(c) -A Rail Transportation Agreement among Burlington Northern I
Railroad Company, the Union Pacific Railroad Company and the
Company (filed as Exhibit 10 to the June 1994 Form 10-Q)
10(d) -Agreement between the Company and AMAX Coal West Inc. I
effective March 31, 1993. (filed as Exhibit 10(a) to the
December 31, 1993 Form 10-K)
10(e) -Agreement between the Company and Williams Natural Gas Company I
dated October 1, 1993. (filed as Exhibit 10(b) to the December
31, 1993 Form 10-K)
10(f) -Letter of Agreement between The Kansas Power and Light Company I
and John E. Hayes, Jr., dated November 20, 1989. (filed as
Exhibit 10(w) to the December 31, 1989 Form 10-K)
10(g) -Amended Agreement and Plan of Merger by and among The Kansas I
Power and Light Company, KCA Corporation, and Kansas Gas and
Electric Company, dated as of October 28, 1990, as amended by
Amendment No. 1 thereto, dated as of January 18, 1991.
(filed as Annex A to Registration Statement No. 33-38967)
10(h) -Deferred Compensation Plan (filed as Exhibit 10(i) to the I
December 31, 1993 Form 10-K)
10(i) -Long-term Incentive Plan (filed as Exhibit 10(j) to the I
December 31, 1993 Form 10-K)
77
<PAGE>
10(j) -Short-term Incentive Plan (filed as Exhibit 10(k) to the I
December 31, 1993 Form 10-K)
10(k) -Outside Directors' Deferred Compensation Plan (filed as Exhibit I
10(l) to the December 31, 1993 Form 10-K)
10(l) -Executive Salary Continuation Plan of Western Resources, Inc., I
as revised, effective September 22, 1995. (filed as Exhibit
10(j)to the December 31, 1995 Form 10-K)
10(m) -Executive Salary Continuation Plan for John E. Hayes, Jr., I
Dated March 15, 1995. (filed as Exhibit 10(k) to the
December 31, 1995 Form 10-K)
10(n) -Stock Purchase Agreement between the company and Laidlaw I
Transportation Inc., dated December 21, 1995. (filed as
Exhibit 10(l) to the December 31, 1995 Form 10-K)
10(o) -Equity Agreement between the company and Laidlaw Transportation I
Inc., dated December 21, 1995. (filed as Exhibit 10(l)1 to
the December 31, 1995 Form 10-K)
10(p) -Letter Agreement between the company and David C. Wittig, I
dated April 27, 1995. (filed as Exhibit 10(m) to the
December 31, 1995 Form 10-K)
12 -Computation of Ratio of Consolidated Earnings to Fixed Charges.
(filed electronically)
21 -Subsidiaries of the Registrant. (filed electronically)
23 -Consent of Independent Public Accountants, Arthur Andersen LLP
(filed electronically)
27 -Financial Data Schedule (filed electronically)
78
<PAGE>
SIGNATURE
Pursuant to the requirements of Sections 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
WESTERN RESOURCES, INC.
March 30, 1998
By /s/ JOHN E. HAYES, JR.
John E. Hayes, Jr., Chairman of the Board
and Chief Executive Officer
79
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
Signature Title Date
Chairman of the Board,
/s/ JOHN E. HAYES, JR. and Chief Executive Officer March 30, 1998
(John E. Hayes, Jr.) (Principal Executive Officer)
Executive Vice President and
/s/ S. L. KITCHEN Chief Financial Officer March 30, 1998
- ---------------------------
(S. L. Kitchen) (Principal Financial and
Accounting Officer)
/s/ FRANK J. BECKER
(Frank J. Becker)
/s/ GENE A. BUDIG
(Gene A. Budig)
/s/ C. Q. CHANDLER
(C. Q. Chandler)
/s/ THOMAS R. CLEVENGER
(Thomas R. Clevenger)
/s/ JOHN C. DICUS Directors March 30, 1998
- ---------------------------
(John C. Dicus)
/s/ DAVID H. HUGHES
(David H. Hughes)
/s/ RUSSELL W. MEYER, JR.
(Russell W. Meyer, Jr.)
/s/ JOHN H. ROBINSON
(John H. Robinson)
/s/ LOUIS W. SMITH
(Louis W. Smith)
/s/ DAVID C. WITTIG
(David C. Wittig)
80
<PAGE>
<TABLE>
<CAPTION>
Exhibit 12
WESTERN RESOURCES, INC.
Computations of Ratio of Earnings to Fixed Charges and
Computations of Ratio of Earnings to Combined Fixed Charges
and Preferred and Preference Dividend Requirements
(Dollars in Thousands)
Year Ended December 31,
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Net Income . . . . . . . . . . . $ 494,094 $168,950 $181,676 $187,447 $177,370
Taxes on Income. . . . . . . . . 378,645 86,102 83,392 99,951 78,755
---------- -------- -------- -------- --------
Net Income Plus Taxes. . . . 872,739 255,052 265,068 287,398 256,125
---------- -------- -------- -------- --------
Fixed Charges:
Interest on Long-Term Debt . . 119,389 105,741 95,962 98,483 123,551
Interest on Other Indebtedness 55,761 34,685 27,487 20,139 19,255
Interest on Other Mandatorily
Redeemable Securities. . . . 18,075 12,125 372 - -
Interest on Corporate-owned
Life Insurance Borrowings. . 36,167 35,151 32,325 26,932 16,252
Interest Applicable to
Rentals. . . . . . . . . . . 34,514 32,965 31,650 29,003 28,827
---------- -------- -------- -------- --------
Total Fixed Charges. . . . 263,906 220,667 187,796 174,557 187,885
---------- -------- -------- -------- --------
Preferred and Preference Dividend
Requirements:
Preferred and Preference
Dividends. . . . . . . . . . 4,919 14,839 13,419 13,418 13,506
Income Tax Required. . . . . . 3,770 7,562 6,160 7,155 5,997
---------- -------- -------- -------- --------
Total Preferred and
Preference Dividend
Requirements . . . . . . 8,689 22,401 19,579 20,573 19,503
---------- -------- -------- -------- --------
Total Fixed Charges and Preferred
and Preference Dividend
Requirements. . . . . . . . . 272,595 243,068 207,375 195,130 207,388
---------- -------- -------- -------- --------
Earnings (1) . . . . . . . . . . $1,136,645 $475,719 $452,864 $461,955 $444,010
========== -------- ======== ======== ========
Ratio of Earnings to Fixed
Charges . . . . . . . . . . . . 4.31 2.16 2.41 2.65 2.36
Ratio of Earnings to Combined Fixed
Charges and Preferred and Preference
Dividend Requirements. . . . . 4.17 1.96 2.18 2.37 2.14
(1) Earnings are deemed to consist of net income to which has been added
income taxes (including net deferred investment tax credit) and fixed
charges. Fixed charges consist of all interest on indebtedness,
amortization of debt discount and expense, and the portion of rental
expense which represents an interest factor. Preferred and preference
dividend requirements consist of an amount equal to the pre-tax
earnings which would be required to meet dividend requirements on
preferred and preference stock.
</TABLE>
<PAGE>
Exhibit 21
WESTERN RESOURCES, INC.
Subsidiaries of the Registrant
State of Date
Subsidiary Incorporation Incorporated
1) Kansas Gas and Electric Company Kansas October 9, 1990
2) Westar Capital, Inc. Kansas October 8, 1990
3) Protection One, Inc. Delaware June 21, 1991
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our report included in this Form 10-K, into the company's previously filed
Registration Statements File Nos. 33-49467, 33-49553, 333-02023, 33-50069,
and 33-62375 of Western Resources, Inc. on Form S-3; Nos. 333-26115 and
333-02711 of Western Resources, Inc. on Form S-4; Nos. 33-57435, 333-13229,
333-06887, 333-20393, and 333-20413 of Western Resources, Inc. on Form S-8;
and No. 33-50075 of Kansas Gas and Electric Company on Form S-3.
ARTHUR ANDERSEN LLP
Kansas City, Missouri,
January 29, 1998
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AT DECEMBER 31, 1997 AND THE STATEMENT OF INCOME AND THE STATEMENT OF CASH
FLOWS FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 76608
<SECURITIES> 75258
<RECEIVABLES> 348443
<ALLOWANCES> 23400
<INVENTORY> 86398
<CURRENT-ASSETS> 25483
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